Performance Cycles

Performance Cycles

As many holders of globally diversified portfolios are likely well aware, foreign stocks have underperformed U.S. stocks in recent years. The chart below, using data from Dimensional Fund Advisors, shows that U.S. stocks, as measured by the S&P 500 Index have outperformed their foreign counterparts from developed (MSCI World ex USA Index) and emerging markets (MSCI Emerging Markets Index) over the last 1, 3, 5 and 10 years as of April 30, 2019.

I empathize with investors who begin to question the benefits of international diversification when confronted with performance figures like this. After all, every dollar allocated to foreign markets over the last decade in aggregate, has served as a drag on performance. However, prior to doing so, investors would be well served to refamiliarize themselves with the case for international diversification.

The case for international diversification is ultimately predicated on my conviction that one of the most effective ways for long-term investors to generate returns and preserve wealth is to hold a portfolio that’s as resilient as possible to the multitude of ways the future could unfold. Absent possession of a crystal ball to help us divine the unknowable future, the best tool we have for building a portfolio resilience is diversification.

Of course, we know with 20/20 hindsight that as investors we would have fared better over the last decade if we had forgone international diversification and instead only allocated to the U.S. market. However, as investors it’s what’s ahead of us that’s of critical importance, not what’s in the past. To help us gain a better feel for the potential range of outcomes we may experience in the years ahead, we can perhaps somewhat paradoxically look to the past to observe the variety of outcomes that we’ve historically experienced. The tables below come from insightful recent research published by Bridgewater Associates, which presents how equity performance stacks up for a variety of countries decade by decade all the way back to 1900[1].

[1]“Geographic Diversification Can Be A Lifesaver, Yet Most Portfolios Are Highly Geographically Concentrated” Bridgewater Associates.

What immediately stands out in the tables above is that no one country consistently outperforms. We can clearly see that the best and worst performers have naturally fluctuated through time. In fact, in many instances an individual country’s outperformance was followed by a subsequent reversal and underperformance.

Recent U.S. market performance demonstrates this phenomenon quite clearly. During the last nearly four decades, the U.S. market has delivered performance decidedly below average twice (1980s and 2000s) both of which were followed by decades where performance ranked near or at the top of the chart (1990s and 2010s thus far). It’s also interesting to note that during the eight decades prior to the 1980s, the U.S. market’s performance could most accurately be described as middling or poor relative to the other countries displayed, having not delivered an above average decade since the 1910s.

Ultimately, I believe investors would be well served to take a way three key conclusions from this cursory review of decade by decade equity market performance:

  1. U.S. outperformance is not preordained—the U.S. market has experienced decades both as an above- and below-average performer.
  2. Reversals appear regularly—above-average performance has routinely been followed by below-average performance and vice versa.
  3. Investors should be prepared for a wide range of potential outcomes—absent clairvoyance, diversification can be an investor’s best friend.


Past performance is no guarantee of future results.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
All performance referenced is historical and is no guarantee of future results.
No strategy assures success or protects against loss.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
All investing involves risk including loss of principal.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market.
Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.


Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Private Advisor Group, a Registered Investment Advisor. Private Advisor Group and Kathmere Capital Management are separate entities from LPL Financial.



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