By Meir Statman, Ph.D., Consultant to Avantis Investors
Meir Statman is the Glenn Klimek Professor of Finance at Santa Clara University and a consultant to Avantis Investors. His research focuses on behavioral finance. He attempts to understand how investors and managers make financial decisions and how these decisions are reflected in financial markets.
His latest book, “A Wealth of Well-Being: A Holistic Approach to Behavioral Finance,” was published by Wiley in April 2024.
International stocks have not done well recently compared with U.S. stocks. The 2024 return of international stocks (as measured by the MSCI World ex USA Index) was just under 5%, lagging by nearly 20 percentage points the return of U.S. stocks (as measured by the MSCI USA Index). And the annualized return of international stocks during the recent 10 years lagged the U.S. by 7.2 percentage points. It is no wonder that many American investors doubt the wisdom of including international stocks in their portfolios.
Yet, as we contemplate excluding international stocks from our portfolios, we should be aware of our tendency to commit recency errors. Stock returns are volatile, and 10 years or even longer are short periods in the lives of stock markets. As shown in Figure 1, U.S. stock returns exceeded international stock returns during some short periods and lagged them during other short periods.
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