It should not be too difficult for investors to remember the financial media’s general recommendation for stock exposure in the previous decade. Based primarily on the enormous success of emerging markets and developed foreign markets – talking heads on CNBC regularly talked about total market cap of world equities being a 50% split between the United States and the rest of the world. Gurus surmised that one should place half of one’s stock exposure overseas.
Over the last four years, of course, this has been a disastrous decision. The move away from 80% U.S/20% international to a 50/50 allocation has been painful for followers of television programs, even readers of writers and listeners of radio show personalities like myself. In my case, however, there is a simple difference. I sell positions early with the help of stop-limit loss orders when they are not working. I do not return to them until they demonstrate verifiable uptrends. For several years now, my stock breakdown has been closer to 90% U.S/10% abroad… if that!
It is not too difficult to see the reason for the shift when we investigate the major equity asset classes. For instance, four years of losses in Vanguard Emerging Markets (VWO) would be challenging for a buy-n-holder to accept. (It is one thing to talk about a twenty-five year commitment; it is quite another to experience disappoint month after month, year after year.)
Of course, it is not just the emergers that have struggled. A broad range of European equities in Vanguard Europe (VGK) have been utterly flat. Considering the way in which the euro-zone’s sovereign debt bear flared up and subsequently turned dormant, a 0% return may not seem so bad. Yet a 60% return for the S&P 500 SPDR Trust (SPY) is a tough pill for global investors to swallow.
It does not get much prettier when you shift to smaller companies either. The iShares MSCI EAFE Small Cap (SCZ) underperformed iShares Russell 2000 (IWM) by roughly 40 percentage points.