Foreign Markets Could Yield Better Returns Than the U.S. in the Mid Term

investing.com:

Let's talk about the importance of diversification in your investment portfolio, especially when it comes to geographical areas.

You know how crucial it is to have a well-rounded investment portfolio to reduce risks in the financial markets. Diversification not only means investing in different types of assets or markets like stocks and bonds but also spreading your investments across various geographical areas.

Here's the interesting part: In the United States, many investors tend to focus on their local market rather than exploring opportunities in Europe or emerging markets. There are a few reasons for this. First, they might not be familiar with those markets, and second, there's the currency effect to consider.

However, the third reason is intriguing. They believe that investing in the U.S. stock market will lead to higher returns. This has been true for the last 15 years, from 2008 to 2023 (end of May). The S&P 500 gained +9.2% during this period, while the iShares MSCI EAFE ETF (NYSE:EFA) returned +2.7%, and the MSCI Emerging Markets index, +1%.

But if we look back even further, the story changes. For example, from 2000 to 2007, the S&P 500 only had an annual return of +1.7%, whereas the MSCI EAFE achieved +5.6%, and the MSCI Emerging Markets soared at +15.3%.

Taking it back to 1970 to 2007, the S&P 500 had an average annual return of +11.1%, but interestingly, the MSCI EAFE surpassed it with +11.6%. It's fascinating to see that the U.S. market struggled in the 1970s and 1980s but performed better in the 1990s and after the 2008 global financial crisis.

This clearly shows why having geographic diversification in your portfolio is essential. Depending on the time period you consider, different stock markets may