Most investors are aware that US stocks have out-performed many other asset classes over the past several years, with emerging markets and some developed markets generating particularly disappointing results. The main reasons for this disparity are relatively well-known – the US economy has performed relatively well, while emerging markets have been impacted by a collapse in commodity prices, and Europe and Asia have experienced sluggish economic recoveries from the Great Recession.

Over the past several months we’ve had a good number of conversations with prospective clients, and a few have argued that “it doesn’t make sense to own foreign stocks”.

Invariably, they will argue that because US stocks have out-performed over the past several years, they will continue to do so into the future. What goes up, must continue going up, right?

This offers us an opportunity to share with them the following graphic. We preface our description of the chart by asking them if they remember how they felt in the late 1990s, when the US stock market had experienced nearly a decade of double-digit annual returns. We ask them if they were feeling optimistic about the prospects for the US economy and the stock market, or pessimistic.

The graphic shows the total return for the decade from 2000 to 2009 for a broad range of asset classes, including US and international stocks, real estate and bonds.


What does the chart reveal?

Well, first, what went up for about 10 years – US stocks – actually didn’t keep going up indefinitely. The S&P 500 index generated a negative total return of about -9% for the decade known as the “aughts”. Pretty discouraging, particularly since the decade before was so spectacular.

Second, there were many asset classes that produced substantially better returns. So there was a tremendous benefit to being diversified in your portfolio. And the best-performing asset class? Emerging markets.

So we find ourselves in 2010. Pundits are referring to the “aughts” as the lost decade for US investors, and debating whether investors are adequately rewarded for taking investment risk.

But the US stock market actually performs quite nicely from 2009 to 2016, notwithstanding some hiccups along the way – Greece in 2011, and Brexit just a few weeks ago, to mention just two.

In 2016, the pundits – and many investors – are again questioning whether it makes sense to own the asset classes that have under-performed – some quite dramatically – since the market recovery began in early 2009.

Our answer? It all depends on your crystal ball. If you have the ability to consistently accurately pick which asset class will out-perform, you should most definitely put all your eggs in one basket. Bet it all on black, as the saying goes. But if you think your crystal ball is a bit cloudy at best, then owning the entire market – a bit of every asset class, in the appropriate proportions – is the prudent course to follow.

We leave you with the following graphic, which shows the “growth of $1” invested in January 2000, through March 2016, for a series of well-diversified model portfolios and the S&P 500 index (a proxy for the US stock market). Note that even the model portfolio invested only 40% in stocks (and 60% in quality bonds and cash) out-performed the concentrated bet on US stocks.