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Writer's pictureSteve Coker, CFP

Staying Diversified


Diversification hasn’t mattered much over the past few years. U.S. stocks have consistently outpaced non-U.S. markets. Even within the U.S., market leadership has been concentrated among a handful of fast-growing technology and consumer companies, while value-oriented stocks have lagged the overall market.

But the recent market turbulence serves as a reminder that nothing can continue indefinitely. The general principle of diversification remains sound: Market leadership has tended to shift among asset classes from year to year. While history is not predictive of future returns, maintaining a broadly diversified portfolio that includes a mix of stocks and bonds from around the world can help mitigate volatility and provide access to opportunity across an evolving opportunity set.

Within the U.S., a closer look at eight major declines shows that broad market index results don’t tell the whole story. Through each of the declines, some sectors held up better than others. Many of the areas that have held up have paid meaningful dividends, which can offer steady return potential when stock prices are declining. Of course, not all dividend payers are equal. The key is to identify companies with strong balance sheets and good cash flows.

International and emerging stock markets have lagged the U.S. by a considerable margin for nearly a decade. This trend may well continue in 2019, when a busy calendar of political events in Europe — a Brexit resolution, European Parliament elections and the selection of a new president for the European Central Bank — is likely to further pressure equity prices.

But investors should avoid the temptation to abandon non-U.S. stocks after years of relatively disappointing returns. In nearly every sector, there are comparable non-U.S. companies trading at lower valuations than their American domiciled counterparts. Classic examples include Airbus versus Boeing and Adidas versus Nike, but there are many more. Samsung trades at six times forward earnings, a level virtually unheard of among U.S. tech giants. Many of these companies have strong balance sheets, solid businesses and long runways. Over the long term, company fundamentals drive stock returns, not a company’s address or political turmoil.

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