From January 2014 through August 2018, the S&P 500 Index, driven by the strength in large growth stocks, particularly large technology stocks, has bested the rest of the major global asset classes by a wide margin. The chart below shows how the S&P 500 has outpaced domestic small and value indices as well as international developed and emerging market stocks. During the period, the S&P 500 returned an annualized 12.4% compared with the next best index, US Small Cap, which delivered 10.2% annualized. For comparison, International Developed Value and Emerging Markets returned 3.7% annualized and 4.6%, respectively.

 

 

Source: Dimensional Returns 2.0
Note: Returns shown as average monthly return.  Annualized returns are lower than average returns due to return volatility.

 

Along with the S&P 500 index relative outperformance has come a litany of narratives to explain why U.S. large growth stocks should continue to outperform the rest of the world. Everything from the 2017 corporate tax cut to a stronger domestic economy to better U.S. corporate earnings growth coming out of the 2008 financial crisis has been used to explain past and projected performance. This begs the question of why bother with other asset classes at all when building a portfolio.

To answer that question, it helps to take a longer-term perspective.  We can begin with the last time the S&P 500 index dominated other global indexes. Going back to the technology-led bull market of the mid- to late-1990s, we see a very similar pattern of returns.

 

Source: Dimensional Returns 2.0
Note: Returns shown as average annual return.  Annualized returns are lower than average returns due to return volatility.

 

From January 1994 through December 1999, the S&P 500 returned an annualized 23.5% compared to 12.2% for International Developed Value and less than 1% annualized for Emerging Markets Small Cap stocks.

Now place yourself at the end of 1999 and try to imagine a compelling reason to invest in asset classes other than the S&P 500. It would have been a tough task. Yet, the reality is global investing did pay off in the following decade. During the so-called “Lost Decade” for stocks following the dot-com boom, the S&P 500 was beaten handily by a wide range of asset classes, including U.S. Small and Value as well as International Developed and Emerging Markets.

 

Source: Dimensional Returns 2.0
Note: Returns shown as average annual return.  Annualized returns are lower than average returns due to return volatility.

 

Returns during the 2000 – 2009 decade were led by Emerging Markets Value, with an annualized return of 17.3%, Emerging Markets Small Cap at 14% per year, and International Developed Small Cap Value with an annualized return of 12.9%. During this period, the S&P 500 returned an annualized loss of almost 1% per year.

Global investing can be difficult when domestic equities are leading the way as it requires a disciplined, somewhat contrarian view of markets. A belief in market efficiency is the underlying driver of the global investing strategy.  It suggests a built-in expectation that market prices will adjust so that long-term returns will ultimately be similar across equity markets despite short-term outperformance by any particular asset class. Build your portfolio around a global investing strategy to put the long-term odds in your favor.