International Investing Archives

Chasing Performance : Don’t Trip on International Stock Funds

Over the past five years, US stocks have trounced foreign stock performance. In case you are now considering a reduction in your foreign stock holdings, let’s take a moment to examine performance-chasing and the benefits of global diversification.

Sensible investors pursue diversification as a policy to reduce risk, not as a tactic to chase performance. By following a disciplined policy of maintaining a well-diversified set of portfolio exposures, regardless of market zigs and zags, investors establish conditions for long-run success. In fact, when taking market conditions into account, investors increase the odds of success by diversifying into asset classes after they suffer poor performance. In any case, foreign equities provide an important tool for reducing portfolio risk without sacrificing expected returns. – David Swensen, Unconventional Success: A Fundamental Approach to Personal Investment

Growth of a $1 investment in stocks, bonds and bills: 1926-2013

The growth of a $1 investment chart, a touchstone for many in the investment advice business, is a source of investment wisdom:

  • Stay the course through the ups and downs.
  • “When it comes to investing for your long-term goals, through history’s ups and downs, there’s nothing like stocks.”1
  • “…the predominant trend for common stocks has been upward. Investors should consider this historical perspective when contemplating asset allocation decisions.”2

Seemingly sound advice. But as you prepare for, or settle into, retirement, it’s worth taking a closer look. Is there even more to this chart than meets the eye? 

International Stock

In my last blog posting, “Is it Safe?” I provided a solid rationale for diversifying overseas, despite current headlines. Still, an ongoing stream of uncertainty might have you thinking that it’s time to forget about a significant allocation to foreign stocks and funds. Fearful investors tend to flee to more familiar home turf, but I would propose the best defense to global volatility remains a prudent – and yes, still relatively significant – allocation to foreign holdings that reflects your personal risk tolerance.

Turmoil and uncertainty in international stock markets, particularly in the Eurozone, may have you feeling as exasperated and perplexed as Dustin Hoffman in the 1976 classic movie “Marathon Man.” 

International DiversificationSzell (Laurence Olivier): Is it safe?

Babe (Dustin Hoffman): I don’t know what you mean. I can’t tell you something’s safe or not, unless I know specifically what you’re talking about.

Szell: Is it safe?

Babe: Tell me what the “it” refers to.

Szell: Is it safe?

Babe: Yes, it’s safe, it’s very safe, it’s so safe you wouldn’t believe it.

Szell: Is it safe?