Part of the art of managing investments is deciding how (if at all) to adjust portfolios in response to specific short-term developments without compromising long-term fundamental principles of prudent investing.
This tension has arisen recently regarding international investments, due to last year’s poor performance of international stocks for U.S. investors (caused by the strengthening dollar) and the disruptions in Greece and China.
Fundamentally, research clearly demonstrates that allocating a portion to international investments should improve equity portfolio performance over most full market cycles. Though U.S. stocks significantly outperformed international stocks from 2008 through 2015, U.S. stocks significantly underperformed international stocks from 2001 through 2007. When looking at the annualized performance from 1970 to present, having exposure to both U.S. and international stocks not only increased returns, but reduced volatility as well (versus holding only U.S. stocks).
Another fundamental force at work these days is the drift of central bank policies around the world, which are at the extreme edge of what have been maintained historically. It is likely that the Federal Reserve will start tightening (i.e., raising) interest rates later in 2015, even as central banks in other developed countries are loosening their monetary policies.
As the Fortune Magazine article below discusses, international stocks have tended to perform better than U.S. stocks during periods of Federal Reserve rate increases. Yet, in 2013, mere talk of the Fed’s raising rates hurt emerging market stocks, as U.S. investors anticipated higher yields in the U.S., decreasing the relative value of investing in higher yielding but more risky international holdings.
As of now, we do not plan to adjust portfolios in response to developments in Greece and China, and remain committed to the more fundamental practices of maintaining broad exposure to international and U.S. markets and monitoring global central bank interest rate policies. For more reading about the effect of the current interest rate climate on all asset classes, click on the article below…