Call it patriotic… call it lazy… but most people stick close to home when it comes to investing.
This so-called home country bias is a phenomenon too big to ignore.
It’s pervasive across time and geography. And even though it makes investors feel all warm and fuzzy inside, it generally tricks us into accepting lower returns and higher volatility from domestically-tilted portfolios.
But my message today is a warning targeted squarely to U.S. investors…
U.S. stocks have trounced foreign stocks for years now.
Whether you look back to October 2007, including the Great Financial Crisis… or from March 2009 onward, capturing just the recovery… U.S. markets have been the best game in town for nearly a decade.
Take a look…
Here are total returns from October 2007 to present…
And here’s how the U.S. did from March 2009 to present…
As you can see, if you’re a U.S. investor who over-allocated to U.S. stocks over the last 10 years… well, you look like a genius! A filthy-rich genius!
But you shouldn’t expect your good fortune to continue forever!
You see, just because U.S. stocks have outperformed for the past decade does not mean they have always outperformed… nor that they will always outperform.
In fact, the outperformance of U.S. stocks, over non-U.S. stocks, in general, is very cyclical. Take a look at this chart from Vanguard…
Going back to 1970, you can see how the outperformance of U.S. stocks waxes and wanes over time.
Sometimes U.S. stocks lead the pack. Sometimes foreign stocks are out front.
Sometimes U.S. stocks become overvalued, relative to foreign stocks, and vice versa.
Sometimes “sentiment” leans toward the U.S…. other times toward foreign markets.
Regardless the specific drivers of these cycles, the mean-reversion nature of outperformance is exactly what we should expect from a capitalist, global economy. Competition keeps the winners in check, over the long run.
But it also represents a dangerous blind spot for investors who have ridden the high of a home-country-bias advantage a little too long.
I’m talking to you, U.S. investors!
It’s easy to get lulled into thinking U.S. stocks will always outperform – particularly after a good, long run… and especially after a decade of outperformance! But as the chart above shows, over-allocating to U.S. stocks is not the best strategy all the time.
Of course, it’s a significant challenge to precisely time the tops and bottoms of the U.S./foreign outperformance cycles. And many advisors would simply suggest building a diversified buy-and-hold portfolio, with appropriately-sized allocations to many markets – U.S. and foreign.
I prefer I more dynamic approach – one that involves adding foreign market exposure for just a few months at a time… only when specific foreign markets are highly-likely to outperform U.S. stocks.
And I use my Cycle 9 Alert algorithm to identify those foreign market “sweet spots,” which can sometimes last for just a few months at a time.
Right now, European stocks are in one of those sweet spots.
Despite facing three significant elections this year – and, in the long-term, worse demographic trends than the U.S – investors have recently been ramping up their buying of euro zone stocks.
In fact, I recommended a specific “bullish Europe” play to my Cycle 9 readers just a couple of weeks ago. And since then, European stocks have beaten the S&P 500 three to one.
We’re sitting on an open profit of more than 30%. But I expect that to grow even larger, since we’re only two weeks into our targeted two- to three-month holding period.
I can’t say for sure whether European stocks will outperform U.S. stocks over the next 10 years – reverting the United States’ recent, decade-long run.
But I do know that investors who are blind to home country bias… those who are always over-allocated to U.S. stocks… will someday be sorely disappointed.
And I know that investors who stay flexible… those cunning enough to bet on foreign markets when the time is right – as it is NOW – will be nicely rewarded.
No matter what you do – don’t get lulled into thinking your domestic market is always the best game in town. Half the time, it’s not!
Editor, Cycle 9 Alert
Follow me on Twitter @InvestWithAdam
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