Foreign stocks had a losing year in 2014, with the MSCI EAFE Index, a wide benchmark of international stock markets, losing 4.90 percent. That’s far worse than the U.S. benchmark S&P 500 Index, which gained 13.69 percent. But that doesn’t mean you should avoid foreign stocks.
First, non-U.S. equities make up almost half of the broad MSCI All Country World Index, and foreign countries have become more prominent contributors to the world’s gross domestic product (GDP). Thus, foreign stocks give investors the chance to broaden their opportunities and their portfolios.
Second, the recent performance of foreign stocks might drive away some investors, but others see it as an opportunity to get a bargain. Different asset classes tend to perform differently at different times, with what’s down going up and vice versa. Indeed, many foreign stocks are cheaper than U.S. stocks based on such common measurements as price-to-earnings ratio and price-to-book value, and they may offer higher dividend yields. While cheaper valuations don’t guarantee higher returns, they may be appealing to certain investors.
Finally, over the long term, international stocks have outperformed U.S. stocks, with the MSCI EAFE Index returning an annual average of 7.67 percent over the past ten years ending December 31, 2014, vs. 4.43 percent for the S&P 500 Index.
Do you think international equities might be right for you? If so, please consult your financial advisor, who’s familiar with your individual financial circumstances and goals and can help you determine the role such investments may play in your overall portfolio.