Published by Taylor Financial Group
By human nature, we tend to stick to what we know. We take comfort in the familiar – one of the main reasons why some people struggle to try new things. Likewise, investors often invest in what they know and are hesitant to put their money in the unfamiliar. For example, investors are more likely to participate in domestic stocks over foreign stocks.
They’re also just as likely to invest in big, well-known companies such as Apple, but not in smaller, less-popular companies. The problem with this is that these investors are potentially missing out on growth opportunities by excluding international and small-cap stocks. Research performed by Carson Institutional Alliance provides evidence in support of this point.
Why You Should Own International Stocks
For starters, there is greater diversification in international stocks. The total number of stocks listed on U.S. exchanges has been cut in half over the past twenty years, while the number listed outside the U.S. has doubled, according to Carson Institutional Alliance. Better growth potential is also a major factor. Over the past twenty years, international stocks have outperformed their domestic counterparts 40% of the time.
Though international markets have fallen out of favor since the financial crisis, with the S&P 500 being fully valued and the strengthening of the dollar, this may be a good time to rotate into international and emerging markets which have lagged the domestic markets. We also have to keep in mind reversion to the mean, which is the assumption that a stock’s price will tend to move to the average price over time – in other words, what hasn’t done as well is likely to perform better. We think that may potentially happen with international markets.
The only evident shortcoming of investing internationally is exposure to greater volatility. That being said, because international companies are influenced by a broader range of market and economic forces, they are inclined to produce varying returns from U.S. stocks. For this reason, including them in a wide-ranging allocation can lower the volatility in your overall portfolio. Lately, international stocks have been doing well with the year-to-date returns at 2.77% as measured by the MSCI All Country World Index, and we think that could continue. The important part is figuring out what portion of your portfolio should be allocated to international sources, which we can help you determine.
Why You Should Own Small-Cap Stocks
Similar to international stocks, small-cap stocks are largely overlooked and disregarded. But they shouldn’t be. According to Carson Institutional Alliance, the average small-cap investor would have earned 9.6% over the past twenty years while the S&P 500 would have averaged 8.6%, not including dividends over the same timeframe. More than that, over the past 83 years (that’s a long time), smaller stocks have outperformed large-caps 55% of the time (that’s a big percentage). These research results indicate that portfolios could potentially benefit from small-cap stocks for growth allocation exposure.
Another, not-so-obvious benefit of smaller stocks is the mere fact that they are not scrutinized by the media or by analysts the way popular companies are. When Apple does poorly, the whole world hears about it – newspapers, analyst shows, online financial publications – it’s everywhere! But smaller companies that are not well known can easily develop new products or enter an untapped market, and it’s hardly mentioned. The lack of publicity gives investors an opportunity to find companies that aren’t all that talked about, but could be a hidden gem.
Let’s not forget, however, that small-cap stocks are often riskier and more volatile. Owning too many small-caps may not be good. So, how to allocate them into your portfolio is something that should be carefully considered.
At the very least, international stocks are a nice complement to domestic stocks, in the same way that small-cap stocks are an excellent accompaniment to large-cap stocks. Not limiting yourself to just one or two types of investments helps you maintain a diversified portfolio. And we continue to believe that diversification is the most important component to pursuing your long-term goals while potentially minimizing your risk.
If you have any questions or want to schedule a meeting to discuss your portfolio allocations, please give us a call.
Carson Institutional Alliance Portfolio Research, “Don’t Let Home Bias Limit Your Portfolio: Why Own International Stocks.”
Carson Institutional Alliance Portfolio Research, “Why Investors Should Own Small-Cap Stocks.”
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index. The MSCI All Country World Index (ACWI) captures the performance of global equities, including the USA, international developed and emerging markets. It is a market cap-weighted index. The MSCI ACWI ex USA captures the performance of securities in the MSCI All Country World Index (ACWI) except for equities within the USA. It is market cap-weighted and covers both developed and emerging markets
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. Additional risks are associated with international investing, such as currency fluctuations, political and economic stability and differences in accounting standards. The stocks of small companies are more volatile than the stocks of larger, more established companies.
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