The Ups and Downs of Global ETF Markets - dummies

By Russell Wild

If you expect emerging market stocks and, thus, ETFs to continue to clock such phenomenal returns, you are sure to be disappointed. If you expect European stock markets to do half again as much as the U.S. markets, you are similarly in for a sad surprise.

You can expect that foreign stocks overall may do better than U.S. stocks in the coming decade or two. But you should still diversify, rather than bet the farm on international stocks outperforming U.S. stocks — or underperforming them either, for that matter. The difference in returns in the future, as it has been in the long-term past, is not likely to be all that extreme.

In all likelihood, international stocks as a whole will have their day. U.S. stocks will then come up from behind. Then international stocks will have their day again. And then U.S. stocks will get the jump. This type of horse race has been going on since, oh, long before Mr. Ed was on the air.

Over a 35-year period from 1975 to 2010, outperformance by U.S. stocks versus non-U.S. stocks has been followed quite regularly by years of underperformance.

[Credit: Copyright 2011. T. Rowe Price. All rights reserved.]
Credit: Copyright 2011. T. Rowe Price. All rights reserved.

The reason to invest abroad isn’t primarily to try to outperform the Joneses . . . or the LeBlancs, or the Yamashitas. Rather, the purpose is to diversify your portfolio so as to capture overall stock market gains while tempering risk. You reduce risk whenever you own two or more asset classes that move up and down at different times. Stocks of different geographic regions tend to do exactly that.