By Edward Cruickshank
Some of you may be familiar with the story of Icarus in Greek Mythology. To escape imprisonment by King Minos, Icarus’ father Daedalus fashioned two pairs of wings out of wax and feathers for himself and Icarus, enabling them to fly. Daedalus tried his wings first, but before taking off from the island, he gave Icarus a warning.
At takeoff, Daedalus instructed his son Icarus most sternly about the rules of flying: “Son, make sure to take the middle way, do not fly too low, for the sea vapors will dampen the feathers and the weight will drag you down. Do not fly too high, for the sun will melt the wax away, and you will fall down.”
The son solemnly promised his father to heed his advice. But as he took to the sky the thrill of flight took over his young and easily enchanted mind, and he flew higher and higher, totally lost in his amazement of soaring with the birds. Soon, the wax started dripping off, the feathers began falling down and he plummeted to the sea to drown as his father watched helplessly.
This Greek myth can serve as a lesson in temperance, moderation and discipline. We can all apply this lesson to our daily lives. It can be especially helpful during stressful times such as the Eurozone Debt Crisis, Internet/technology bubble or the real estate frenzy – all of which have occurred within the last 12 years.
In light of the current concerns involving the eurozone, it’s important to view the non-U. S. stock market in a larger context historically and its important position in the global economy.
In 1970, the United States represented almost 70 percent of the world’s stock market capitalization. At the end of 2012, the entire world stock market capitalization stood at $37 trillion; 54 percent of that was outside the United States. In fact, of the 15 largest companies in the world, 11 are based outside the U.S.
Over the last few years, having a portfolio allocated to foreign stocks has certainly hampered returns relative to large and small cap U.S. stocks. Due to headline and economic concerns related to Europe, stock prices in developed and emerging market countries have been discounted greatly. “Return leadership” from various countries in different asset classes can change quickly and should be expected in a properly diversified portfolio.
Investors who follow a structured, diversified strategy are more likely to capture the returns wherever they occur. Stock markets around the world will continue to underperform and outperform the U.S. market, and this performance is unpredictable and at times extreme. Since 1987 the U.S. stock market, when compared to other developed global markets, has only led in calendar year returns once; 2011.
Critics of international diversification rightly note that it does not protect investors against short-term declines. We believe that this misses the larger picture. Over longer and more meaningful time periods, having a portfolio that is spread out across multiple countries and asset classes has been beneficial to portfolio returns. The longer the time horizon, the more diversification can benefit a portfolio.
To increase the odds of having a good investing experience, investors would be best served to heed Daedalus’ warnings and take the middle road. Fly neither too high, nor too low. Diversify your allocations across multiple global asset classes to suit your plan, unique circumstances, financial goals and risk preferences. Trying to market time can lead to ineffective diversification and increase costs that arise from moving money to the “best” international market.