As the Summer Olympics kick off, there’s a lesson from games past that could serve investors well today: You don’t know where the next winner will come from.
Olympic history is littered with unheralded underdogs who sneaked up to grab the gold. Think of Mary Lou Retton, a 16-year-old with minimal experience in international competition, becoming the first American woman to win a gold medal in gymnastics. Or the 1980 U.S. hockey team—a collection of college players and amateurs—skating past the Soviets on the way to Olympic glory.
Investing can be just as surprising. You never know what asset class might perform best in the future. That’s important to remember at a time when it might be tempting to ditch your exposure to international stocks.
International markets admittedly haven’t given investors much to cheer about recently. China’s economy is slowing, economic growth in Japan remains weak, and the Brexit vote raises questions about future growth in Europe. So why keep an allocation to international stocks? Here are a few Olympic reminders that could help you stay the course:
- The “Dream Team” doesn’t always win. No one can predict winners—or losers—with certainty. When the U.S. started filling its Olympic basketball rosters with NBA stars, few thought Team USA would ever fall short of the gold. They did, losing three times in the 2004 Olympics and settling for an embarrassing bronze medal.
U.S. equities have also disappointed in the past, and when they disappointed most, an allocation to international stocks would have helped cushion the blow. If we look back to 1969, U.S. and international stocks have delivered similar returns. But if we isolate the worst 10-year stretch over that period—February 1999 to February 2009—U.S. stocks lagged far behind, delivering a 40% loss, while losses from international stocks came to just 10%.1
“That’s an enormous difference and really speaks to the value of maintaining globally diversified exposure even when times are difficult,” says Jeffrey Kleintop, senior vice president and chief global investment strategist at Charles Schwab & Co.
- Running marathons barefoot. One of the most famous Olympic moments came when Ethiopian Abebe Bikila won the marathon at the 1960 Olympics—without shoes! Spectators might have assumed going shoeless would put him at a disadvantage, but from Bikila’s vantage point, it was fine. He had trained barefoot.
You could apply the same logic to some foreign stocks. While the economic outlook in Europe and Japan looks weak, investors shouldn’t underestimate stocks from those regions. In fact, the starting point for such stocks could be good for long-term investors, Jeffrey says. He says metrics such as price-to-earnings ratios that are used to assess whether stocks are over- or under-valued suggest that valuations for international stocks are slightly below their long-term average.
That could be good for international stocks going forward. “Lower stock market valuations have preceded periods of higher future stock market total returns,” Jeffrey says. “In fact, in any prior period when global stocks sat at today’s valuations levels, they’ve always produced positive returns over the next 10 years.”2
- Olympics are global, and so are consumption trends. The number of countries participating in the Olympics has grown almost 10-fold over the past 100 years. The field of winners is also more diverse: Emerging market countries now claim half of all Olympic medals.3
The middle class is going global too. By 2030, two-thirds of middle-class spending will be from emerging markets.4 “The adoption of middle-class lifestyles on a global scale will likely have huge implications for providers of goods and services of all types,” Jeffrey says. “A lack of exposure to international stocks could mean missing out, as this megatrend could provide new growth opportunities for companies around the globe.”
Stay the course
Watching the Olympics is less stressful than watching your money. But the unpredictability of the events is a reminder for long-term investors: It’s nearly impossible to predict how different assets will perform in a given year, which is why it makes sense to maintain diversified exposure. International markets may not have the best economic outlook today, but if you don’t hold some international companies in your portfolio, you may be missing out on major worldwide investment themes and valuable diversification over the long term.
1Charles Schwab, Bloomberg data as of 7/10/2016. Data measure 10-year rolling returns. U.S. stocks are represented by the MSCI USA Index. International stocks are represented by the MSCI EAFE Index.
2 Based on returns for the MSCI World Index. Source: Charles Schwab, Factset data as of 07/10/2016.
3Ursua, Jose. “The Economy of the Olympics.” Council on Foreign Relations. 08/10/2012.
4 Kharas, Homi. “The Emerging Middle Class in Developing Countries.” OECD Development Centre. January 2010.
What you can do next
- Changing economic conditions can affect how each component of your portfolio performs. It’s impossible to predict which one will be the top performer in any given year—that’s why diversification is so important. Want to talk about your portfolio? Call our investment professionals at 800-355-2162.
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