The front cover of Wall Street Journal showcased the news, “Propelled by Tech Stocks, Nasdaq Tops 8000 for the First Time”, followed by “Nasdaq Soars Past 8000 to Record” in even bigger print on the front of the Business & Finance section of the August 28, 2018 edition. To be sure, the US stock markets have been hot in recent years, despite what many have expected to happen. This is a great thing, but it may cause some to question the philosophy of global investing. Although non-US stock markets have been mostly positive for the last 12 months, they have not been as strong as the US markets. It is always wise to question and re-examine important aspects of one’s life, and this is not an exception.
We know that short term stock market returns are often volatile, and stock markets in different countries have different returns for any given time period. That is the main point of global diversification. To quote an article written by Dimensional Fund Advisors:
“Diversification implies an investor’s portfolio is unlikely to be the best or worst performing, but diversification provides the means to achieve a more consistent outcome and most importantly helps reduce and manage catastrophic losses that can be associated with investing in just a small number of stocks or a single country.” 1
All of that sounds good, but let’s look at some real data from recent decades:
DFA Global Balanced
Equity Strategy S&P 500 Index
January 1970-December 1979 13.4% 5.9%
January 1980-December 1989 22.0% 17.5%
January 1990-December 1999 13.6% 18.2%
January 2000-December 2009 7.5% -0.9%
January 2010-December 2017 12.3% 13.9%
January 1970-December 2017 13.7% 10.5%
As you can see, global diversification is not always the “winner” when comparing returns to the S&P 500, but it does generally outperform the S&P alone and has historically lead to higher investor returns. That is why we build our portfolios to be globally diversified. So, if you are questioning global diversification, ponder the numbers above, and stay the course.
- Why Should You Diversify? Dimensional Fund Advisors, March 2016
The Dimensional Equity Balanced Strategy Index is comprised of commercial and Dimensional indices, 70% US equity indices, and 30% non-US indices. US: S&P 500, large cap value, small cap, small cap value, Dow Jones REIT; non-US: international value, international small cap and small cap value, emerging markets, and emerging markets value and small cap.