Boring Advice, Better Expected Returns
The financial media went into overdrive hyping the sharp decline that the market experienced at the beginning of 2016. Much less has been made of the recovery of the S&P 500 Index, which closed on March 2 with an unremarkable 2.81 percent loss for the year. Good news doesn’t sell. Bad news creates fear and anxiety, which generates commissions and fees for the securities industry.
Ignore short-term data
The emphasis on short-term results is harmful to your returns.
The securities industry and talking heads love to speculate about the future of the global markets. I have yet to find credible evidence that they have the expertise to predict what the markets will do next reliably and consistently. One area of constant chatter is whether investors should globally diversify their holdings or focus on U.S. stocks.
It’s easy to make the case for U.S. stocks. From Jan. 1, 2010 through Feb. 29, 2016, the S&P 500 Index returned a stellar 11.66 percent. The MSCI World ex USA Index returned only 2.26 percent and the MSCI Emerging Markets Index lost 2.28 percent.
Before you succumb to the temptation to limit your investments to U.S. stocks, here are some issues to consider:
Almost half of the world’s market capitalization is represented by non-U.S. stocks. There are 10,000 foreign stocks from 40 different countries. A properly diversified portfolio should include these equities.
While the recent performance of foreign markets has been disappointing, over the long term, globally diversified investors have benefitted. For the period from January 2000 to December 2009 (often called the “lost decade” for U.S. stocks), the S&P 500 Index lost 9.10 percent. The MSCI World ex USA Index (net dividends) gained 17.46 percent. The MSCI Emerging Markets Index (net dividends) gained a whopping 154.28 percent.
The media and financial pundits spend a lot of time trying to predict which country will outperform. A recent article in The Globe and Mail reported that “big banks” predict Canadian stocks will outperform U.S. stocks in 2016. This prediction may turn out to be right or wrong. The odds are about the same. I suspect this article may cause some Canadian investors to overweight their portfolios in Canadian stocks. Canada represents 3 percent of the world equity market capitalization. The United States represents 52 percent.
In 2015, Canadian stocks lost 24.2 percent, making them the worst performers in the equity markets for developed countries last year. Danish stocks gained 23.4 percent. Even a cursory review of the best- and worst-performing countries over any extended period of time indicates an element of randomness. Here’s a list of top performers from 2007 through 2015: Hong Kong, Japan, Norway, Sweden, New Zealand, Belgium, the United States (in both 2013 and 2014) and Denmark.
How likely is it that you and your broker could identify those “winners” prospectively?
A better approach
The more prudent approach is to maintain exposure to a globally diversified portfolio of low-management-fee index funds. For do-it-yourself investors, here are three index funds from Vanguard that I discuss in The Smartest Investment Book You’ll Ever Read:
1. The Total Stock Market Index Fund (VTSMX), which gives broad exposure to the U.S. stock market.
2. The Total International Stock Index Fund (VGTSX), which gives broad exposure to international stocks.
3. The Total Bond Index Fund (VBMFX), which gives broad exposure to the U.S. bond market.
You will have to determine what allocation between stocks and bonds is suitable for your individual circumstances and goals. This asset allocation questionnaire is a good starting point for making that decision.
Intelligent and responsible investing is not difficult. It starts with the realization that much of the financial media and the traditional securities industry are disseminating information that serves their economic interest and not yours.
This commentary originally appeared March 8 on HuffingtonPost.com
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