Behavioral Advisor: What’s Your International Exposure?
The surging US economy and stock market have left international markets behind, with the S&P 500 Index beating the MSCI EAFE Index1 by 7.1% per year for 11 years. But US equities don’t always outperform the rest of the world, and the potential of international equity returns shouldn’t be overlooked. Currently, most investors are under-allocated to international equities and now might be a good time to invest more overseas.
ANNUALIZED PERFORMANCE DIFFERENTIAL OF S&P 500 INDEX AND MSCI EAFE INDEX (SEP 1978 – SEP 2018)
Source: S&P Dow Jones Indices LLC and MSCI Inc.
The chart above shows the performance differential between the S&P 500 and MSCI EAFE indices. There are extended periods where one market significantly outperforms the other. Over the past 40 years, when the US outperforms, the cycle tends to last longer but has lower annualized outperformance. On average, when international developed markets beat the US, the cycle is shorter but has much higher annualized outperformance.
Investors worldwide, and US investors are no different, tend to over-allocate to their own domestic equity markets versus the rest of the world. For example, the average US investor has a 75% allocation to domestic equities compared to the US market capitalization of 52%. Conversely, the US only accounts for 22% of global GDP. Notably, 76% of companies with a market capitalization over $1 billion are located outside the US.
Not having enough international exposure can be costly. Given the cyclical nature and magnitude of the relative outperformance, having adequate exposure and a disciplined approach to rebalancing are keys to building long-term wealth.
From the Behavioral Viewpoint
What is going on?
As a result of home country bias, investors in all countries tend to allocate more to domestic investments, even though there are many attractive opportunities abroad.
We are more exposed to information about US companies and, due to familiarity bias, are more comfortable with them.
Inertia and momentum can lead to a status quo bias, it’s always hard to sell a winner and buy the laggard.
What can we do?
Remember that while one type of investment or market may dominate at times, things can and do change. View current conditions in the context of a longer-term perspective.
Invest globally in your equity portfolio and take a disciplined approach to portfolio management and rebalancing to effectively capture potential opportunities over time.
Work with a financial advisor as a trusted resource and coach. Gain from their experience, perspective and insights. Building wealth is a long-term endeavor that requires time and discipline.
- The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada. The Index is widely used as a benchmark for international developed markets.
IMPORTANT INFORMATION AND DISCLOSURES
The information provided here is for general informational purposes only and should not be considered an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. It should not be assumed that recommendations of AthenaInvest made herein or in the future will be profitable or will equal the past performance records of any AthenaInvest investment strategy or product. There can be no assurance that future recommendations will achieve comparable results. The author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions. AthenaInvest disclaims any responsibility to update such views. These views may not be relied upon as investment advice or as an indication of trading intent on behalf of AthenaInvest.
You are solely responsible for determining whether any investment, investment strategy, security or related transaction is appropriate for you based on your personal investment objectives and financial circumstances. You should consult with a qualified financial adviser, legal or tax professional regarding your specific situation. Investments involve risk and unless otherwise stated, are not guaranteed. Past Performance is no guarantee of future results.
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