US vs. International Stocks: Historical Cycles of Outperformance

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One major question in portfolio construction is how to allocate between US stocks and non-US stocks. Over the last 10 years, US stocks have outperformed International stocks significantly. However, as the following chart shows, they tend to take turns outperforming each other in cycles:


Chart is from Factor Investor, found via Abnormal Returns.

This is not a recommendation for market timing, as for starters you don’t know how long each cycle will last. For me, it is more of a visual reminder of why you might choose to diversify between US and non-US stocks. You don’t need as much as I do, but I think some is prudent. Things may not look great internationally right now, but that’s why valuations are also much lower, which in turns sows the seeds for a future bull market. Are you okay with your portfolio if the cycle shifts again?

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  1. Well, it looks like investing internationally has not been a net winner for US investors since the early 1990s. And that is one very long time period of doing worse than expected, despite supposedly doing the right thing of avoiding some of your home bias. And you never know how long it would take for that cycle to turn, to make your wait worthwhile.

    I read some articles, which discussed that the lower valuation of international stocks is due to exposure to different sector allocation relative to that in the US. If you normalize for sector exposure, valuations seemed comparable.

    When you see lots of people start questioning whether to own international after a long dry spell however ( such as the past decade), perhaps that means it is worth it to add some international πŸ˜‰


    • “Well, it looks like investing internationally has not been a net winner for US investors since the early 1990s.”

      That is the problem with generalizations if you lump all emerging economies into 1.

      if you observe India or Chinas market over the past 20 years you would have gotten tremendous returns.. way more than these charts show.. you just have to be an avid reader of news and know WHICH international markets to shortlist

    • If I ever stop investing in international stocks, that will definitely be a good indicator that huge performance is coming. πŸ™‚ Same with Bitcoin, if I ever put a big amount in Bitcoin, it will be time to sell!

  2. Another thing to consider is that many large U.S. companies already have a large global presence. So you get international exposure in that way by owning such companies.

  3. A related article from Charles Schwab that says “Global stock market correlation lowest in 20 years”.

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