| Do International Stocks (Still) Make Sense for Long-Term Investors? After what might feel like a very long period of U.S. market dominance, it’s fair for investors to wonder why they should bother investing both at home and abroad. The US stock market may also be the biggest in the world, but investors who ignore other global markets may miss out on a wealth of opportunity. Let’s explore why international stocks should hold a place in most long-term portfolios. It’s easy to question non-U.S. stocks after the fact following a poor run, but, as investors, we should be careful not to infer that past performance can predict what will happen next.
Figure 1 shows rolling three-year returns for US, non-US, and global (both US and non-US) stocks from December 1990 through October 2022. By looking at past performance, an investor in the early 2000s could have made the wrong decision to favor U.S. stocks only to find out that non-U.S. stocks performed better shortly after. Just like past performance is no guarantee of future results, recent U.S. market outperformance has no bearing on what will happen forward.
Stocks of the roughly 18,500 companies trading outside the US represent nearly 40% of the world’s $88 trillion equity market. When determining where to invest, a country’s size, population, or gross domestic product may not be a primary consideration. Japan, for instance, is relatively small in landmass but accounts for 6% of the world’s equity market value, representing more than 2,500 companies, including familiar names like Toyota and Sony. Even a tiny country like Switzerland is home to publicly traded giants like Nestlé and two of the world’s biggest pharmaceutical firms. Investing in multiple countries can deliver more reliable outcomes over time, helping investors stay on track toward achieving their long-term goals. The Bottom Line Ignoring international markets comes at the cost of diversification. This doesn’t mean allocating to non-U.S. stocks at the same weight as the global market (about 40% today) is the right choice for everyone. There are many reasons why an investor may be better served by having a lower allocation to non-U.S. stocks, such as taxation and costs. Investors are best off making these decisions within the context of a long-term investment plan rather than inspired by emotion or recent events. |
| Past performance is not a guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. |
| 1. In USD. Market cap data is free-float adjusted and meets minimum liquidity and listing requirements. Dimensional makes case-by-case determinations about the suitability of investing in each emerging market, making considerations that include local market accessibility, government stability, and property rights before making investments. China A-shares that are available for foreign investors through the Hong Kong Stock Connect program are included in China. 30% foreign ownership limit and 25% inclusion factor are applied to China A-shares. Many nations not displayed. Totals may not equal 100% due to rounding. For educational purposes; should not be used as investment advice. Data provided by Bloomberg. |
| For informational purposes only. Any information provided has been obtained from sources considered reliable, but SCM Investment Services does not guarantee the accuracy or the completeness of any description of securities, markets or developments mentioned. This communication is not intended as investment advice nor as an offer or solicitation to buy, hold or sell any financial instrument. Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. |