Short-Run Considerations for the Long-Term International Investor

Abstract

The hallmark of international investing over the long run is portfolio diversification; its benefits are sometimes unclear over shorter investment horizons. A focus on the cyclical equity bull and bear markets that can obscure the long-term case for international investing shows that a portfolio diversified into foreign stocks has typically provided higher returns or lower volatility than a U.S.-only portfolio, although behavioral and practical considerations call for a smaller allocation than standard recommendations. In the end, investors must weigh the expectations of long-run risk-adjusted return against the potential regret of underperforming benchmarks or peer groups over shorter investment horizons.