Diversification: Stick with It

Wednesday, December 21, 2016 |

It has been a tough few years for asset classes not comprised of US Stocks:

Market Returns

Source: Morningstar Direct

 

This has clients questioning the value of having international stocks. Certainly, over the years we have reduced our positions; however, there are a few related reasons why sticking with these allocations and adding to them once the tide turns may make sense.

 

Given the above outperformance, International Stocks seem more attractive and potentially offer higher returns moving forward (though likely with more volatility):

Forward Returns

Source: Research Affiliates, Capital Advisors, Ltd.

 

US Stocks haven’t always outperformed. And they may underperform again given the above forward return prospects:

 

Past Performance

Source: Morningstar Direct

 

While US Stocks have been the best asset class as of late and might continue to be for the next few years, this trend may reverse at some point in the not so distant future. As such, for investors not trading on a short/intermediate-term time horizon, maintaining your international stock exposure and being prepared to add to it when the tide changes may be a prudent strategy.

 

Diversification does not guarantee a profit, or protect against a loss.  Past performance is no guarantee of future results.  The above charts are for illustrative purposes only and do not attempt to predict actual results of any particular investment.

S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market. Investors cannot invest directly in an index.

The MSCI Emerging Markets Index is an index created by Morgan Stanley Capital International (MSCI) and is a float-adjusted market capitalization index that is designed to measure equity market performance in emerging markets. It consists of indices in 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and Arab Emirates. With 834 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

Morgan Stanley Capital International (MSCI) EAFE Index (Europe, Australasia and Far East) is an index created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by major MSCI indexes from Europe, Australia and Southeast Asia.

Large Cap refers to companies with a market capitalization value of more than $10 billion. Large cap is an abbreviation of the term "large market capitalization." Market capitalization is calculated by multiplying the number of a company's shares outstanding by its stock price per share.

International investing involves special risks, including, but not limited to, the possibility of substantial volatility due to currency fluctuation and political uncertainties.

The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or Lincoln Investment.

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