In April, market results continued to diverge. International stocks were up again, and bonds were slightly up as well. US large and small-cap stocks went down in value. So far for the year, international stocks are the clear leader, followed by bonds. US large and small-cap stocks have declined.
A Historical Perspective
So far to start the year, international diversification has been a big help to portfolio returns. The following chart from Charles Schwab gives some historical data on the relative performance of US and international stocks over time:
The navy-colored areas represent US stock outperformance, while the lighter blue represents international stock outperformance. Consider the following:
- In the long run (50 years of data), we have seen cyclicality and mean reversion. At certain times, US stocks have performed better, while international stocks have also had periods of success. Essentially, neither has been better than the other all the time.
- In the shorter run (10 years), trends tend to persist. In other words, one asset class tends to have a period of sustained success relative to the other. For example, over the past 15 years, US stocks have dominated international stocks, but when the cycle changes, its very possible international stocks could outperform, potentially for years. But, there is no hard and fast rule for when these cycles change.
- Investors can take two basic strategies in response to this information. The first is to concentrate (invest a large part of your portfolio) in only one asset class in the attempt to guess which will do better. The other is to diversify, allocating some money to both. Diversification guarantees exposure to both the leader and the laggard.
- Concentrated portfolios have a wider range of outcomes. If you concentrate effectively, your results will be better than average, but if you are wrong, your results will be worse. Meanwhile, a diversified portfolio will have less extreme outcomes over time, plus less volatility.
Neither a concentrated nor a diversified strategy is better or worse than the other – each has benefits and potential drawbacks. We tend to favor diversification, because in our experience, it effectively helps you reach your financial goals by making large losses less likely. This makes it easier to continue to invest over long periods of time.
Another approach might be to concentrate a smaller portion of your investments, while diversifying a larger portion. This gives you some exposure to higher potential returns, while not putting your longer-term financial goals at risk.
We appreciate the trust you have placed in us. If you would like to discuss this chart or the benefits of concentration and diversification in more detail, let’s talk.
