While at the end of the 19th century the United States only had about 15% of the global stock market in terms of market capitalization, it is now almost 60%, with Japan the second largest country with a disproportionately smaller share of 6.3%. For about 15 years now, US stocks have had a hard time looking for competition in terms of performance as well. The question of why they should have non-US stocks in their portfolio is logically creeping into the minds of many investors.
The outperformance of US stocks is not as obvious as it might seem. The table shows, over the horizon since 1970, alternating periods in which US stocks have outperformed the rest of the world with those in which the opposite is true.
The following table shows the same, only in the form of average annual performance of stocks in the United States and the rest of the world.
The chart from the JPMorgan Asset Management workshop then shows the length of individual periods of relative outperformance and underperformance of stocks in the US and abroad.
In short, world stocks have gone from relatively expensive to relatively cheap over the past decades, while US stocks have gone from relatively cheap to relatively expensive. Can this trend continue? Maybe. Would you bet on it in your portfolio? It is up to you.
Diversifying a portfolio should be self-evident, but it is sometimes psychologically challenging for investors. In any diversified portfolio, at any given moment there are assets that underperform, sometimes for a very long time and significantly. But with unilaterally focused portfolios, investors expose themselves to the risk that these assets will lag behind, and they will thus achieve below-average returns in the long term.
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