“The only thing new in the world is the history you do not know” -Harry Truman

The last few years should have reiterated to all investor show quickly things can change, and that tomorrow is never known.

Many investors attempt to identify trends and patterns in Market data that is nearly completely random. Princeton economics professor and author, Burton Malkiel, displayed this in his 1973 book “A Random Walk Down Wall Street”.

Malkiel created a hypothetical stock that was initially worth $50. The closing price of the stock was determined by a single coin flip each day. If the result was heads, the price would close a half point higher, but if the result was tails, it would close a half point lower.

Malkiel had the stock price mapped out onto a chart (shown below) and then took the chart to a technical analyst (a person who seeks to predict future movements in stock prices by finding patterns) to get their opinion on whether or not the stock was a “buy” at this point. The analyst responded that the stock should be purchased immediately.

Looking at the chart above maybe a technical analyst would conclude the stock is in a breakout trend, but of course no such trend existed. The path is completely dependent on a 50/50 coin flip each day, while the results of prior flips bore no influence on the outcome of future flips.

Investment Selection

Over the years while meeting with prospective clients and reviewing their 401k investment allocation I would ask how they arrived at making their investment selections in the plan. The most common answer was along the lines of “those were the funds that performed the best historically”.

On a 401k investment lineup investors can often see each fund’s 1,3-,5-, and 10-year prior returns and that data can influence someone making those selections.

More recently, what would have that resulted in? A large overweighting towards US equities and an underweight to the rest of the world’s equities. Why? Let’s look at some recent data using the S&P 500 Index (which is a good representation of US stock market performance) compared to the MSCI world Ex USA Index.

It seems obvious from the data above that US stocks have been vastly superior to non-US stocks. As usual, there is more to the story. Let’s pick another time period, this time a 10-year period ending in with 2007:

Now imagine you are selecting your 401k investments as of January 1^st 2008 and you see these returns above in your fund selection lineup, it is highly likely one might favor non-US equities at this point just about the time US equities were about to embark on a period of incredibly high relative outperformance.

The longer-term data shows that non-US equities have earned very similar returns as US equities. Data from Larry Swedroe’s book “Your Complete Guide to Factor Based Investing” shows that from 1966-2015 US equities provided an annualized premium above US Treasury Bills of approximately 4.4%while the rest of the world provided about 4.5%.

Things Can Change Quickly!

Trailing returns can change in a hurry. One glowing example of this comes from a recent piece from Dimensional Fund Advisors.

On the first section of the picture below we can see the how growth stocks handily outperformed value stocks as of March 31, 2000 almost no matter what lookback period you used.

The second half of the picture shows the lookback periods just one year later, and this time it shows a much different story, in the favor of value.

One short year suddenly changed which had done better over the prior 1,2,3,4,5,6,7,10, and 15 year periods.

Home Country Bias and Japan

Home country portfolio bias is not specific to US investors. Canadians overweight Canadian stocks. Germans overweight German stocks, and soon and so on.

This might be hard to believe but from 1970 – 1989 the MSCI Japan Index (Gross Dividends) compounded at 22.89% annualized. Over those 20 full calendar years, $1 invested in the Japanese stock index would have morphed into$61.67.

Imagine being a Japanese citizen near the tail end of this euphoric bull market. Why would you even consider investing into the equities of any other country? In 1989 Japan had the 6^th largest economy in the world and investors were making money hand over fist in Japanese equities.

Unfortunately, from 1990 – 2022, the same MSCI Japan Index compounded at 0.65% annualized and from 1990 – 2016 it actually produced a negative return. For the full 1990-2022 period, $1 invested only grew to $1.24. Ouch! A Japanese investor during that era may have been well served adopting a global approach to their portfolio.

Reviewing global investment returns over the past 20calendar years, you can see the returns at the country level are pretty random year by year. While the USA has done extremely well, it has not been the best.

Owning a portfolio that is widely diversified across all countries can be a good way to smooth out the results over time.

Disclosures: This article is for informational purposes only and should not be considered a recommendation. Information contained in this article is obtained from third party resources that Meredith Wealth Planning deems to be reliable. Consult with a financial advisor before implementing any strategies. Past performance does not equal future results. Meredith Wealth Planning does not guarantee any minimum level of investment performance or the success of any index portfolio, index, mutual fund or investment strategy. You cannot invest directly into an index, and index returns do not account for real life fees and transaction costs.

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