The Fallacy of Betting on the Best Stock Market

Performance chasing is not a sound investment strategy

December 2024. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

• Many U.S.-based investors see no point in investing in international equities
• The U.S. has outperformed over the recent decade, but underperformed in prior periods
• There is little performance consistency with winners becoming losers, and vice versa

INTRODUCTION

Many U.S.-based investors find little value in international diversification. The appeal of investing solely in indices like the S&P 500 or the Russell 3000 is straightforward: the U.S. stock market provides access to the world’s largest economy, these indices provide exposure to international markets via the numerous American companies that generate revenue overseas, and the majority of leading tech giants are headquartered in the United States. Finally, if investors had allocated to Europe, Japan, or Emerging Markets over the last decade, they would have generated a significantly lower return.

While these arguments are valid, U.S. stocks have become expensive, and as every regulatory disclosure reminds us, future performance is not guaranteed by past results. Relying solely on U.S. equities can amount to performance chasing – an unsound investment strategy (read Chasing Mutual Fund Performance).

In this research article, we will emphasize the risks associated with failing to diversify across the global equity markets.

U.S. VERSUS INTERNATIONAL STOCK MARKETS

A comparison of U.S. stock performance with Global ex-USA, Japanese, European, and Pacific markets reveals no consistent dominance by U.S. equities. Between 1986 and 1996, Asian markets outperformed, while European markets delivered comparable returns until 2012. It was only in the last decade that U.S. stocks have significantly outpaced their global counterparts.