Is Investing Beyond The U.S. Stock Market Worth It?
The US has been by far the strongest performing of the world’s major stock markets for some time. But is investing beyond the U.S. Stock Market worth it?
The US has been by far the strongest performing of the world’s major stock markets for some time. Over the 10 years to 31 July 2021 it’s delivered gains of 298.4% compared with the rest of the global stock market’s 78.1% returns. The US is also by far the largest stock market in the world, making up nearly 60% of the total global stock market. By comparison, the next largest – Japan – makes up less than 6%.
That’s The End Of That Then?
So that surely solves it – the US is both the biggest and best performing market in the world by a country mile, so why invest anywhere else?
While undoubtedly the biggest, it’s not necessarily the best though. Yes, it has been the best performing market in recent years. Any investor worth their salt, however, knows there’s no such thing as a sure-fire winner in investing. If the past can teach us anything, it’s that the future can be very different. Let’s breakdown the performance of the US and global (excluding the USA) stock markets into the five decades stretching back to 1970. Here’s the most recent decade, clearly showing the level of outperformance by the US.
This is what’s caused many investors to question why you’d want to invest in the rest of the world. Past performance aside, there also are very compelling reasons to invest in the US. You’ll find many of the world’s leading companies across all industries, an enormous number of stocks for fund managers to select, and some of the most innovative and promising businesses around.
The same can be said about the rest of the world though.
Although the US currently makes up over half of the global stock market, only invest there and you’ll miss out on over 40% of the world’s opportunities. That’s a big amount to shun. Not only that, in previous decades the combined performance of the rest of the world’s stock markets has actually done better than the US more often than not. In fact, the US stock market performed better than the rest of the world in just two of the past five decades.
So by not investing outside the US, you’re potentially holding back your future returns. Of course nothing is guaranteed, and we’re not predicting the rest of the world will perform better than the USA in the years ahead. We’re simply saying you shouldn’t assume the US will carry on outperforming everything else.
Currency – Concerned?
Doesn’t investing outside the States expose US investors’ returns to foreign currency volatility?
Yes it does, but so does investing in the US stock market.
Investing in any major stock market, US or otherwise, means much of your investment is likely to be in the large multinational firms that dominate markets. Those companies usually earn a significant amount, if not most, of their earnings abroad. Around half the revenues of Apple, Microsoft, Alphabet (Google’s parent company) and Facebook, for example, comes from outside the US. Thinking the US stock market avoids foreign currency exposure is plain wrong.
For long-term investors (and we believe all investors should be), however, currency shouldn’t really be that much of a concern. Over time the impact of currency tends to be dwarfed by market performance.
In the 30 years to 31 July 2021, the US Dollar appreciated around 20% against Sterling, depreciated roughly 20% versus Japanese Yen and was more or less flat against the Euro. In US Dollar terms, however, the global ex-US stock market rose 467.7%.
By investing in all the world’s major stock markets you’re still getting a large exposure to the US, but also access to companies in Europe, Asia and emerging markets. Any one of these areas could be the top performer in the years to come. So if the US goes through a rough patch, an internationally-diversified portfolio could offer more protection and potentially greater returns.
That’s why Skybound Wealth portfolios invest in all the major markets from around the globe. We don’t try to predict which parts of the world will perform strongest. Instead we invest your portfolios in broadly the same proportion as the global stock market, and let the market decide. That way, you’ll always have exposure to wherever is on top, whether that’s the USA or not.
Written By Jonathon Curtis, Head of Investment Research
Past performance is not a guide to future returns. Investment in securities involves the risk of loss and the advice herein cannot be construed as a guarantee that future performance will be reflective of past returns.
Investing involves risk including the loss of principal. No guarantees of investment performance are offered. Your account values will fluctuate and there will be periods involving negative returns. Investing requires a long term time horizon.
The advice provided by Skybound Wealth Management USA, LLC is provided through a registered investment adviser tailored to suit your individual circumstances and risk appetite. Registration as an investment adviser does not imply a certain level of skill or training.
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