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Is it Time to Abandon a Global Stock Portfolio?

For better or worse, investing is a favorite topic of cocktail party conversation. Let’s say Vicky, with a globally diversified stock portfolio, ambles over at a party to compare notes with Roger, who invests in a US-only portfolio. She hears that Roger’s domestic stock portfolio is up 19% year to date; her globally diversified stocks have returned only 9%. Vicky suddenly comes down with a bad case of what the Chinese call “red-eye disease”: envy. She weighs cutting her foreign exposure and loading up on more US stocks.

The recent relative performance of US stocks has certainly been impressive. Year to date through July 12, US stocks gained 19% (as measured by the S&P 500 Index), compared to a 7% gain for international developed country stocks (represented by the MSCI EAFE Index) and a 12% loss for the MSCI Emerging Markets Index. During the 2 ½ year period from January 1, 2011 to June 28, 2013, US stocks returned a cumulative 35%, 26 points ahead of international and a wide 47 points better than emerging markets, which lost 12%.

Yet if Vicky switches domestic for foreign stock holdings now, she would be falling victim to what in behavioral finance is called availability bias – the belief that easily recalled recent outcomes (in this case, US market outperformance) will persist going forward. It is this bias that compels emotionally driven investors to buy last year’s winners and sell the losers. Is “red-eyed” Vicky making a wise decision if she shifts to a domesticdominated portfolio now?

Gerstein Fisher examined this question in two different ways: the year-by-year historical performance of individual asset classes and the global vs. domestic portfolio over extended investment cycles.

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