Today I would like to tackle the answer to the question, why should I be invested internationally? This question has been asked by investors more frequently after the horrible year international stocks had in 2014. So lets look at the data and see if there is any reason to keep international stocks in your portfolio.
International Stocks in 2014
Every sector or international stocks lost money in 2014. International Large and international small both lost about 5%, The Emerging Markets sector (stocks in countries that are “emerging”) lost about 2%. *1. Compared to the strongly positive S&P 500 (Large US Companies) performance last year these returns are embarrassing. You are probably wondering why everyone doesn’t just invest in Large US companies?
International Stocks 2000-2014
2000 through 2014 was not necessarily a great time period for any sector of the market, but international stocks definitely held their own. US Stocks are in blue, International Stocks are in red.
Category 2000-2014 Annual Return
S&P 500 Index 4.24%
Intl Large Value index 4.35%
Intl Small index 7.57%
Intl Small Value 10.32%
Emerging Markets Index 7.38%
Emerging Markets Small 9.80%
*1. Obviously this chart doesn’t include every sector, but it illustrates a very important point. International stocks are extremely valuable in your retirement portfolio, but you also have to be diversified in your international stocks and not just own international large stocks, like most of the population. Most retail investment advisors cannot get you into categories like international small value and emerging markets small.
International Stocks From the Beginning
Accurate records for international stock data goes back only to the 1970’s, but lets take a look at the data going back to then. International Large stocks return from 1973 to 2013 was 9.51% per year. International Small Stocks during the same time period had a jaw dropping return of 13.39% per year. *2. This further proves that there is a long term advantage to having a diversified mix of international stocks in your portfolio.
International stocks in 2015
I just wanted to briefly mention that year to date, international Large stocks are beating US Large stocks by over 3%. *3. So those of you who sold out on international after the poor year and bought into the S&P might be second guessing that decision now.
A lot of investors get caught up in what is happening in the market over the last minute, day, month, or year. It is important to keep the long term perspective and stay diversified no matter how hard it is to not drop out of sectors that are under performing in the short term.
by Jimmy Hancock
References
1. Matson Money. Investor Jeopardy Powerpoint. Mason, OH: Matson Money, 24 Feb. 2015. PPT.
2. Matson Money. Portfolio MRI. Mason, OH: Matson Money, n.d. PDF.
3. Yahoo Finance. Yahoo!, 11 Mar. 2015. Web. 11 Mar. 2015.