The Only Guide to Alternative Investments You'll Ever Need: The Good, the Flawed, the Bad, and the Ugly

Chapter 4. International Equities

Once investors start to think beyond their own borders, one asset class they usually consider is the large-cap stocks of the developed markets.

Investing in international stocks, while providing expected returns similar to those of domestic stocks, provides the benefit of diversifying the economic and political risks of domestic investing. Thus, the gains from international diversification come from the relatively low correlation among international securities. This is especially important for those who are employed in the United States, as it is likely that their intellectual capital is highly correlated with domestic risks.

There have been long periods when U.S. stocks performed relatively poorly compared to international stocks. And, of course, the reverse has also been true. For example, for the period 1970 through 1986, the MSCI (Morgan Stanley Capital International) EAFE (Europe, Australasia, and the Far East) Index outperformed the S&P 500 Index 15.4 percent versus 10.6 percent a year. Over the next twenty years, from 1987 through 2006, the S&P 500 outperformed the MSCI EAFE Index 11.8 percent versus 8.4 percent a year. Over the entire period, the MSCI EAFE Index and the S&P 500 provided very similar returns, with the MSCI EAFE Index outperforming the S&P 500 by 11.6 percent versus 11.2 percent a year.

However, the MSCI EAFE Index exhibited greater volatility. Its annual standard deviation was 21.9 percent. This compares to the 16.8 percent ...