Larry Swedroe, Chief Research Officer at Buckingham Strategic Wealth , 7/19/2019
I’ve been getting lots of questions about the benefits of international diversification. The questions are variations of “Why do I want to own these poorly performing investments that also create currency risk?”
Among the two most well-documented investment biases are home country (leading to dramatically overweighting one’s home country relative to global market capitalization) and recency (leading to performance chasing – buying what has outperformed at relatively high prices and selling what has underperformed at relatively low prices). Having a knowledge of history, and understanding that when it comes to all risky assets, even a decade of underperformance is likely nothing more than noise, can help overcome such biases. With that in mind, let’s go to my trusty videotape.
If you asked most investors about the long-term relative performance of U.K. and U.S. stocks, they would assume that U.S. stocks would have far outperformed. Recency bias, and the collapse of the pound sterling in the post-WWII era, would be a contributor to that belief. From 2009 through 2018, the S&P 500 Index outperformed the FTSE All-Share Index by 5.3 percentage points per annum (13.1% versus 7.8%, respectively). And the outperformance is much greater over the last five calendar years (2014-2018), with the S&P 500 outperforming by 9.7% per annum (8.5% versus -1.2%).
Now let’s take a trip back in time to a decade ago and look at the long-term performance. The FTSE data goes back to February 1955, so we will use that as our starting point. From February 1955 through December 2008, the FTSE returned 10.4% per annum, outperforming the S&P 500 Index’s return of 9.7% per annum by 0.7%age points. Even through 2013, the outperformance was still 0.7 percentage points per year (11.0 versus 10.3). That’s almost 60 years of outperformance. What conclusions would you have drawn? If we extend the data through 2018, the S&P 500’s advantage is small: 10.2% versus 10.0%. The slight underperformance occurred while the pound was falling from $2.80 to about $1.26, a drop of 55%!
Investors should not allow relatively short periods of outperformance to influence long-term investment strategies. Nor should they allow home country bias to lead to under-diversification of their portfolio. We have one more important point to cover.
Valuations and recency
The recent outperformance of U.S. stocks has led to their relative valuations (the best predictor we have of future returns) to be dramatically higher than that of the U.S. For example, as I write this on June 15, 2019, the CAPE 10 for the U.S. is about 30, while for developed European markets it’s about 19, and for developed Asia-Pacific it’s about 15.
For those interested in learning more, I recommend the February 2019 paper by Vanguard’s research team, “Global Equity Investing: The Benefits of Diversification and Sizing Your Allocation.” The authors, Brian Scott, Kimberly Stockton and Scott J. Donaldson, began by noting that as of September 2018, U.S. stocks accounted for 55.1% of the global equity markets – almost twice the low of 29% it reached in the 1980s. Thus, regardless of residence, investors who focus solely, or mostly, on domestic stocks exclude a large portion of the global equity market.
The authors also examined the issue of currency risk. They first note: “Long term, currency has no intrinsic return – there is no yield, no coupon, no earnings growth. Therefore, long term, currency exposure affects only return volatility.” In terms of volatility, they found that in all regions, currency risk had very little impact on long-term performance, whether it was hedged or not. Sometimes hedging reduced volatility; in others it led to an increase. Hedging incurs costs (reducing returns) and increases the correlation of returns (reducing diversification benefits).
Scott, Stockton and Donaldson concluded that a good starting point for investors is weighting by global market-capitalization. As the chief research officer for Buckingham Strategic Wealth, I agree.
This commentary originally appeared July 5 on AdvisorPerspectives.com
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It’s been a whirlwind few years at JDH. Three new members joined our team. We moved in a massive way from being a paper-based firm to a digital firm. We’re even introducing online client portals this fall.
How did we choose the new logo?
We launched into a series of firm meetings to discuss: what are the firm’s goals? How do we see ourselves in the context not only of the firm but in the greater community? What makes us different than other wealth management firms?
We realized that starting conversations with the intent of improving the lives of those we encounter is a central piece of each of us here at JDH Wealth. With that in mind, we decided to find a new image that really speaks to who we are and what we want to accomplish. We dropped the word “management” from the logo, for the purposes of clarity of intent.
We took our name and built it into a symbol of growth, of goals, of aspirations – all with JDH Wealth as the support structure holding those up.
We’re pleased to share with you this rebirth of the JDH Wealth logo, and look forward to supporting you now and in the future.
by Timothy J. Delaney, Founding Partner
JDH Wealth Management is now in its 18th year of business. When I look back over those years, I am amazed at where we started and where we are today. I also think back to the many changes to our world during this time, of which I will discuss two of them.
The first one is the introduction of the iPhone about 10 years ago. Until then, no one, even Steve Jobs, could have envisioned how one device would so change our world. (Watch him introduce it to the world for the first time.) Besides being a phone, it also became our clock, flashlight, camera, timer, compass, music player, video player, texter, emailer and many other uses. Prior to this invention, who would have guessed land lines would be a thing of the past?
The other big change was the method of investing. Prior to the development of mutual funds, the only way to invest in a company was to buy its stock. As a kid growing up in the 60s, I can remember my dad reading the Wall Street Journal and looking at pages and pages of individual stock prices. Then in the 70s and 80s, mutual funds really captured the investing public’s attention. However, the philosophy for investing, whether stocks or mutual funds, was to buy large US companies, hoping to hit some home runs with the individual stocks or the mutual fund manager would outperform others and beat an appropriate benchmark.
Investment Strategy Innovations
The investment industry has changed over the last few decades. Academic research regarding stocks and investment management has spurred on these changes. One of the implications from extensive research is that professional money managers cannot consistently outguess and beat the stock market. This is supported by years of industry performance data.
Fortunately, I was exposed to this academically based, passive approach to investing in the late 1990s. Prior to this, I was just like most other investors, always believing that hope springs eternal. When I started JDH in 2000, I had changed my investment philosophy to align with this passive investment approach. So much so, it became one of our core investment principles.
The research continues to prove this was the correct move back then, and still to this day. As this academically based research evolved, another core investment principle was developed, which was small companies have higher expected returns than large companies and value companies have higher expected returns than growth companies.
Eugene Fama was one of the pioneers of this research for which he was awarded the Nobel Prize in Economics in 2013. (You can read his curriculum vitae here.) He is also a member of the Dimensional Fund Advisors (DFA) Board of Directors. DFA is the primary mutual fund company we use to implement our investment philosophy.
If you own mostly large US “blue-chip” stocks, which I refer to as some of the large US companies of the past 10-40+ years, this research and our real world interactions over the past 20 years shows that you are missing out on significant long-term growth opportunities in your portfolio. You would be missing higher expected returns by not having allocations to small, value and international asset classes.
These concepts of diversification and exposure to small, value and international stocks were all new to me more than 20 years ago. I adopted them when most people didn’t. They have changed my life and the lives of our clients. When we first began working with DFA in 2000, they were maybe the 40th largest mutual fund company in the world. Today, DFA manages $460 billion and is the 6th largest mutual fund company in the world.
Just as technology and the world changes, the financial world is continuously changing. We keep learning, researching and monitoring, all with the goal of providing you and your family with a better investment experience.
Have you and your investments evolved and changed for the better over time? Are you using the optimal method? Are your friends and family?
© 2017 JDH Wealth Management, LLC
Gracious, it’s hard to believe I’ve been with JDH almost six months! On the one hand, the time has flown by and on the other hand, it feels as if I’ve been here for years already.
It’s been a pleasure getting to know some of you in the past few months, and I look forward to meeting more of you at our upcoming Broadway Under the Stars event on June 17th and August 12th. Since I’m going to be sticking around here for a while, I thought I’d tell you a little more about myself.
One of my interests, which I’m sure I share with more than a few of you, is music. I started out singing and dancing along to Cats in my living room when I was five. (Sadly, no home movies of those glorious performances still exist.)
I learned to love folk music from my mother and Pink Floyd from my dad; classical choral pieces from my choir director in church; fifties crooners from my grandmother; punk and jazz from dorm-mates in college; and the blues from an amazing, year-long road trip in my early thirties. Fun fact: my mother couldn’t carry a tune in a bucket when I was born. We spent so much time together commuting to theatre rehearsals and singing along to musicals in the car that we now can sing harmonies together!
After a friend taught me how to play guitar, I ended up recording my own album as a singer-songwriter. Here I am regaling friends at an impromptu farm concert:
I joined a Dixieland band a few years ago, where I started out playing washboard and graduated to a full drum kit. Dixieland is such a fun style for a drummer. It’s full of whistles, kazoos, washboards, and cowbell hits. The Sebtown Strutters, as we named ourselves, can be seen from time to time playing at the Community Market in Sebastopol or at private events throughout the county.
Next time we speak, tell me about the music in your life! Do you listen to music at home? In your car? Have you played an instrument? Are you a shower singer? I’m a firm believer that everybody can make music, and I encourage it in every way I can.
By Dan Solin, Director of Investor Advocacy, The BAM Alliance
I don’t know Warren Buffett. I didn’t interview him for this article. But I’m pretty sure I know what he isn’t doing to cope with the worst first four trading days in history for the S&P 500 index to begin a calendar year.
Buffett isn’t listening to pundits on TV
Years ago, my colleagues and I conducted a fairly large-scale research project. We interviewed a bunch of high-income professionals who provided professional services. This group included doctors, dentists and lawyers, and like most of us, they earned money only when they were working. In essence, they traded their time for dollars.
Our finding was this: Homes and retirements accounts aside, the most valuable asset they owned was the person staring back at them in the mirror each morning. Chances are, the most valuable investment you own is the investment called you.
From recent equity performance to risks facing investors in the current market environment, Chief Investment Officer Jared Kizer and Director of Investment Strategy Kevin Grogan share market insights on a range of topics and answer questions about our overall investment strategy in this BAM Alliance webcast.
We talk about riding the ups and downs of the market… but how about the real ups and downs of the world’s tallest roller coasters?! For some fun, check out these top thrill rides from around the world. And hang onto your seats!!