With U.S. stocks outperforming the rest of the globe by several measures this year, investors may take that as evidence to stick to home grown investments. But a new study by Ritholtz Wealth Management suggests global diversification is key.
“We’re more comfortable owning what we know,” said Michael Batnick, director of research at Ritholtz. “But history has suggested that time and time again, U.S. stocks versus international stocks go on long periods that persist outperformance.”
As part of his study, Batnick focused on the S&P 500 (^GSPC) for U.S. stocks and the MSCI EAFE Index (EFA), which tracks 900 shares in 23 developed countries, for the rest of the globe. Specifically, he examined three-year rolling returns periods dating back to 1972, three years after the inception of the MSCI EAFE index. He found that U.S. stocks only beat foreign stocks roughly 53 percent of the time. On average, that outperformance lasted 45 months.
Even better news for investors with diverse portfolios, Batnick found the MSCI EAFE index consistently outperformed the S&P 500 by a larger margin. While the S&P 500 outperformed by an average of 7.17%, the MSCI EAFE index did so by 8.64 %.
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Despite those numbers, Batnick says U.S. investors have been reluctant to move away from what he calls, the home country bias.
“Diversification has been a drag on portfolio returns and very frustrating for a long time. This is currently the longest record, if you’re looking at a three-year annualized rolling period of outperformance,” he said. “There’s been no reason to suggest that you should diversify outside of America.”
For those looking to diversify, Batnick recommends owning a broad index that doesn’t focus on particular countries or sectors. He adds, it’s important to get in now, keeping in mind the leadership switches back and forth after sustained periods.
“I’d say, own the whole index…and be patient,” he said.
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