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INVESTOR LETTER - MARCH 2019

INVESTOR LETTER - MARCH 2019

March 13, 2019

Global stocks spent most of the first two months of the year heading up. While the noise that caused last year’s dip is now behind us, we’re sure that some other headline will bubble up at some point and we’ll have another bout of volatility. This comes with the territory with stock investment, and this up and down past is a big part of why stock investments historically outperformed bond investments.

Another up and down trend that we’ve been talking with clients about is international investing. Investing in non-U.S. stocks over the past decade has surely been a drag on performance. Consider that U.S. stocks (S&P 500 Index), gained an annualized 13.1% over the last 10 years ending in 2018. By contrast, non-U.S. stocks (MSCI ACWI ex USA Index) returned only an annualized 6.6%.

Some clients asked us why we continue to invest in international stocks since they have done so poorly, and some clients told us we should have known that the U.S. would have been the best market. While we wish we had a crystal ball that would tell us what the best performing market would be every year, we don’t. And, since we don’t we’ll stick with our investment strategy of including both U.S. and non-U.S. stocks in our portfolios.

But, to be fair, we’ll give some more perspective on why we feel that including both U.S. and non-U.S. stocks in our portfolio is a wise approach. It is important to note that the diversification benefits of international investing are earned over time, not on a year-by-year basis (and sometimes not on a decade-by-decade basis). We’ve seen decades where U.S. stocks have outperformed, like the 1990s, and we have seen decades, like the 1980s, where non-U.S. stocks have outperformed.

Trying to time when to be in one nation’s stock market or another is a nearly impossible task. While there are no reliable indicators of when we should be in one market or another, one potential approach would be based on stock market valuations (i.e., how expensive a market is versus another). However, non-U.S. markets have had more attractive valuations than U.S. markets for many years now, but U.S. markets continued to outperform.

If we look at a combination of valuation metrics like the ones from German asset manager Star Capital, we can see that the U.S. ranks 38 out of 40 from an attractiveness standpoint at the end of January. That means, 37 non-U.S. stock markets have better valuations (i.e., they are cheaper) than U.S. stocks.

Given that non-U.S. stocks are much less expensive than U.S. stocks, maybe we should sell our U.S. stocks and invest exclusively in non-U.S. stocks. Probably not, because we’d cut out one of the largest stock markets in the world from our portfolio. And, the same is true for non-U.S. stocks. Excluding them would mean we exclude a vast number of opportunities outside the U.S.

There are no certainties when it comes to investing. The reality is that the U.S. has done better than non-U.S. markets over the past 10 years. Yet, we needed to know that 10 years ago, but we didn’t, just as we don’t know now what the best performing market will be over the next 10 years. In our mind, and the historical evidence supports, including both in our portfolios makes sound investment sense.

If you have any questions about your investments or want to discuss any financial planning needs, please reach out. We are here to help you reach your financial life goals!