If you've been to a Disney park with small children at any time in the last half century, the chances are good you rode in small boats that tour the globe with animatronic dolls singing, "It's a small world" over ... and over ... and over.
While these dolls get the message, sadly, most investors seem to miss it. One of the most global investing myths I encounter regularly is, ironically, home-country bias -- the belief stocks in your country of domicile are somehow "superior" to stocks outside it.
Many Canadians think Canadian stocks are tops. Brits often believe the FTSE 100 is the bee's knees. And most Americans think stocks listed in the U.S. top all else. But as these contradictory beliefs suggest, there is no permanently superior nation -- country leadership rotates. Moreover, investing globally adds diversification that can mitigate country-specific risks.
U.S. stocks' outperformance from 2013 through 2016 -- and cumulatively since this bull market began in 2009 -- convinced many Americans non-US stocks were lousy. Yet in reality, market leadership rotates between the U.S. and stocks outside America. While the U.S. is en vogue this cycle, in the last bull market (2002-2007), non-US stocks -- especially emerging markets -- widely outperformed. Folks accurately recall the go-go 1990s as U.S.-led, but forget that the 1982-1987 bull market so many credit to Ronald Reagan's policies was led by stocks outside America. That isn't a slight on Reagan so much as it is an acknowledgement of larger global factors at work.
Beyond cycles, market leadership often rotates mid-stream. Exhibit 1 plots the rolling 12-month return of non-U.S. stocks minus U.S. stocks from 1970 through May 2017. U.S. stocks outperformed in 311 of the 558 rolling 12-month periods shown, or 55.7% of the time -- a figure inflated by this bull market.[i] As recently as May 2011, that figure was 50% -- a draw. While U.S. stocks have shined in this cycle to date, that doesn't equate to superiority.
Exhibit 1: Leadership Rotates Often
Source: FactSet, as of 6/16/2017. Rolling 12-month return, MSCI World Ex. USA including net dividends and MSCI USA including gross dividends, in USD. December 1970 - May 2017.
Still, many investors will likely dismiss history and simply claim non-U.S. stocks are "riskier" -- "foreign" to them. In my view, this is backwards -- a global approach allows you to mitigate country-specific risks in ways a U.S.-only portfolio cannot.
Political choices like tax policy, regulation and trade policy often disproportionately affect the country where they are made. While credit markets are fully global, a country's monetary policy is still likely to affect it more directly than others. You can mitigate these risks by diversifying globally.
After all, if (for example) President Trump enacts tariffs on Canada, French stocks will likely be impacted a lot less. And U.K. investors were positively giddy with their global portfolios last year when the plunging pound caused the value of foreign investments to soar.
Even in a country as large as the U.S., investing globally will increase the number of options and potentially aid diversity. For example, let's say you were bullish on telecom, particularly, bigger telecom firms.
In America's Russell 3000 Index -- a super-broad gauge with 2,917 constituents -- there are only 31 telecom firms and only two I'd call big. Twenty-six have a market valuation under $10 billion. Small!
By contrast, you can choose from 22 telecom firms topping $10 billion in the MSCI World Index, a gauge of the developed world. Aiming to emphasize bigger firms? America has 64 firms exceeding $75 billion in market cap, which is pretty good. The MSCI World includes those 64 and adds another 32. Having more options, to me, is better.
Lastly, consider: Are these foreign firms really so alien to you? As I discussed in my 2009 book, Own the World, if you consider products, it doesn't seem like it. Is your alarm clock 100% American? What of your car, your clothes, your coffee? Chances are you're employing the products of non-U.S. companies frequently in your day-to-day activities.
Most Americans do! Take Walt Disney's cue: It's a global world after all, so why not invest globally and benefit when those companies profit from it?
[i] Source: FactSet, as of 6/16/2017. MSCI World Ex. USA including net dividends and MSCI USA including gross dividends, in USD. December 1970 - May 2017.