Nearly every financial adviser will tell you that foreign stocks should be part of a well-diversified portfolio. Yet, an analysis of the data shows that non-US (foreign) stocks as an asset class have underperformed the US market by a meaningful amount for more than 40 years, in addition to having higher risk. So, why do it?
The debate between index fund investing and active fund investing is decades old. It really isn’t much of a debate, if you ask me. Historical data from Vanguard and S& P Dow Jones Indices shows that index funds have outperformed actively managed funds in every investment category over the long-term. But there’s another measure that isn’t discussed as frequently. It’s the payout.
I am a die-hard index fund advocate. Yet, there are times actively managed mutual funds make sense in a portfolio. No, this isn’t April Fools’ Day and I am not going senile. There happens to be situations where a low-cost actively managed fund does a better job than an index fund at capturing the return of an asset class or capturing a unique risk within an asset class.
Experienced investors are keenly aware of four dangerous words that can ruin a portfolio. They are “This time, it’s different.” People who utter these daring words see past market returns as a product of past economic conditions. They also see today’s conditions as being far different than any time in the recent past, thus they believe markets should behave differently.
Today’s higher than average market valuation shouldn’t preclude you from putting new money into stocks. History shows that if you buy at today’s valuation and hold for the long-term that you will be amply rewarded. One way to look at the results is by measuring the market’s return using a same P/E to same P/E time horizon.