Today begins a two-part series on investing in international stocks. Over the past four years, international investments have done poorly relative to domestic investments. For example, from 2010 through 2013, while the S&P 500 Index returned 15.9 percent per year, the MSCI EAFE Index returned just 8.6 percent per year, and the MSCI Emerging Markets Index returned just 3.2 percent.
The underperformance trend continued through the first five months of this year. This underperformance, combined with poor economic news coming from the rest of the developed world and much of the developing world, has led to an increasing amount of questions I’ve received from investors along these lines: Why should we own international equities given the poor performance and their continued economic problems?
Over the years, I’ve learned that individual investors persistently make the same mistakes. My book, “Investment Mistakes Even Smart People Make and How to Avoid Them,” details 77 of them.
One of the most persistent mistakes is what is referred to as “recency”—the tendency to overweight recent events/trends. That leads to ignoring long-term evidence. And that, in turn, leads investors to buy after periods of strong performance and sell after periods of poor performance—as in “buy high and sell low.” It results in doing the opposite of what investors should be doing, which is to rebalance in order to maintain their portfolio’s asset allocation.
Read the rest of the article on ETF.com.