The past 10 years have been a lost decade for many investors.$INX) in October 1999, a decade later you would be looking at a loss of more than $900. Lock your money up in stocks for 10 years and lose 1% a year? It's not supposed to work that way.
So what about the next 10 years? It might be just as grim for many investors, who are still sitting on portfolios that are likely to make the next decade as unrewarding as the last.
But it doesn't have to be that way.
Let's rewind to 1999 and imagine that instead of putting all your money into an S&P 500 fund you had invested in China -- say, by buying into Matthews China (MCHFX). Instead of a 1% annual loss, you would have seen an average annual compounded return of 18.17% for each of the next 10 years.
Of course, few people recognized way back then that China would be the investment story of the decade. Let's say that instead you had simply bought into a mutual fund that invested broadly in emerging markets, such as the T. Rowe Price Emerging Markets Stock Fund (PRMSX). Your average annual compounded return for the 10-year period would have been 12.06%.
Ready to have a good cry?
- If you had invested $10,000 in the S&P 500, as many people did, you would have been left with just $9,090.52 after 10 years.
- A $10,000 investment in T. Rowe Price Emerging Markets would have grown to $31,225.27.
- And a $10,000 investment in Matthews China would have grown to $53,097.29.
And you know what's even worse? Ten years ago, the conventional wisdom preached diversifying a stock portfolio by putting a hunk of money into overseas markets and a piece of that into emerging markets.Simply following the prevailing common wisdom 10 years ago and putting 10% of your money into emerging stock markets would have turned your 1% annual loss on a 100% S&P 500 portfolio into a small gain, leaving you with $10,357.53. That's a not-so-hot 0.35% average annual compounded return.
But a gain is always better than a loss, and getting a $1,267 swing to the good on a $10,000 investment just from making one easy-as-falling-off-a-log asset-allocation decision is a pretty decent return.
Anybody who doesn't think $1,267 is real money is welcome to send it to me.
A question of balanceYou can't go back in time and redo your underexposure to overseas stocks, in general, and emerging-markets stocks, in particular, but you can try not to make the same mistake in the next 10 years.
All the evidence, though, is that U.S. investors are about to do it to themselves again.
The U.S. share of the global stock market is falling as other countries build larger economies and deeper capital markets. In 2004, U.S. capital markets accounted for 53% of the value of all shares in the world that were free to trade, according to Standard & Poor's. (Many shares in markets such as China and India are locked up under government control and aren't free to trade.) By 2007, that percentage was down to 44%, and by 2008 it had fallen to 41%.
Asset allocation by U.S. investors hasn't kept pace with that change. Depending on what group of investors you measure, U.S. investors have somewhere between 2% and 20% of their equity portfolios in overseas stocks. Among 401k investors, about 12% of their stock portfolios are in overseas stocks.
If you simply look at the makeup of the world's equity markets, U.S. investors are heavily overweighted in U.S. stocks and seriously underweighted in foreign stocks.