ANNUALIZED PERFORMANCE DIFFERENTIAL OF S&P 500 INDEX AND MSCI EAFE INDEX (SEP 1978 – SEP 2018)
Source: S&P Dow Jones Indices LLC and MSCI Inc.
The chart above shows the performance differential between the S&P 500 and MSCI EAFE indices. There are extended periods where one market significantly outperforms the other. Over the past 40 years, when the US outperforms, the cycle tends to last longer but has lower annualized outperformance. On average, when international developed markets beat the US, the cycle is shorter but has much higher annualized outperformance.
Investors worldwide, and US investors are no different, tend to over-allocate to their own domestic equity markets versus the rest of the world. For example, the average US investor has a 75% allocation to domestic equities compared to the US market capitalization of 52%. Conversely, the US only accounts for 22% of global GDP. Notably, 76% of companies with a market capitalization over $1 billion are located outside the US.
Not having enough international exposure can be costly. Given the cyclical nature and magnitude of the relative outperformance, having adequate exposure and a disciplined approach to rebalancing are keys to building long-term wealth.
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