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It’s a Big World

Jonathan Clements  |  April 16, 2016

IF YOU WANT TO FEEL SHORT, stand next to somebody tall. Want to feel badly about your portfolio? Compare it to the Standard & Poor’s 500-stock index.

Over the five years through March 31, the S&P 500 notched an annualized total return of 11.6%, versus 7.2% for the Russell 2000 index of smaller U.S. stocks, 2.3% for MSCI’s Europe, Australasia and Far East index and a loss of -4.1% a year for MSCI’s Emerging Markets index. The credit for the S&P 500’s robust performance belongs to U.S. blue chip growth-company stocks, which have climbed 13.1% a year over the past five years, three percentage points a year better than the bargain-priced shares of slower-growing “value” companies.

All this is reminiscent of the late 1990s, when the S&P 500 was all but unbeatable and those with globally diversified stock portfolios had their prudence rewarded with relatively lackluster returns. But lest we forget, this is the fate every year of those who diversify: You never do as well as the best-performing asset class—but you also avoid the drubbing suffered by those who put all their eggs in the basket that turns out to have the worst results.

Still, owning a globally diversified stock portfolio feels especially foolish when the S&P 500—and also the Dow Jones Industrial Average—post strong results. These aren’t the yardsticks against which we should measure the performance of a global stock portfolio. But they are the indexes whose performance we hear about every day—and those two indexes also contain the stocks we’re most comfortable owning.

That sense of comfort, however, comes at a price. Forget the past five years—and think about the past 15. Over that stretch, the S&P 500 climbed 6% a year. That was better than developed foreign markets’ 4.4% annual gain, but far behind the 7.7% scored by small U.S. stocks and the 9.4% enjoyed by emerging markets.

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