While I always caution not to get too wrapped up into short-term results, the rebound from the depths of February has been nice. So now when the kooks come out to say either Dow 40,000 or the next Great Depression is coming, remember to not pay attention to either side. They really don’t know; they are just trying to sell you something.
As U.S. stocks have outperformed foreign stocks over the last few years, I’m hearing from people that they don’t need to invest outside the U.S. I’ve heard from more than one person that they can just buy an S&P 500 index fund and forget about making any other investments.
I was mostly through writing a pretty big piece about the need for global diversification and I had some charts and graphs and I was mostly ready to go with it, and then I thought, wait, this is actually pretty simple.
Remember the so-called “lost decade” for stocks? From 2000–2009 the S&P 500 Index recorded its worst ever 10-year performance, with a total cumulative return of −9.1%. Right, well, for those of us who stayed fully diversified, it wasn’t a “lost decade” at all. Depending on your level of bonds, your annual returns wound up being pretty much in the mid-single digits, around 4-6% percent per year. Not great, but not bad, and certainly not a “lost decade.”
Let’s use round numbers since I’m writing over the weekend. Say you started in 2000 with just an S&P 500 index fund and $1,000,000. After a decade you would have had $909,000. If you were globally diversified, with varying levels of bonds, that same $1,000,000 would have grown to between $1,480,000 and $1,790,000. That’s a big difference.
Don’t think that just because something has done better recently that it always has or it always will. In investing, it’s often the opposite. Don’t think that you “know” where the best investments will be in the upcoming years. You really don’t. Just as it was smart to stay globally diversified during the so-called “lost decade” it still makes sense to do so now.
Looking at performance for each of the 11 decades starting in 1900 and ending in 2010, the US market outperformed the world market in five decades and underperformed in the other six. Stay diversified and don’t fall into the trap of thinking you “know” more than you do.