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Market Update

Getting Better Results Abroad

A more disciplined investment approach can help investors avoid bad outcomes.

Investors looking to improve their portfolios' diversification by investing in stocks outside the United States haven't had an easy time of it. Non-U.S. equity markets have lagged by a staggering margin over the past decade, with international market benchmarks falling behind their domestic counterparts by about 9 percentage points per year over the trailing 10 years through Aug. 31, 2020. That partly reflects the generally strong U.S. dollar, but non-U.S. stocks have fallen behind their stateside counterparts even before the effect of currency movements, partly because of weaker earnings growth.

Making matters more depressing, the returns international fund shareholders actually experienced after accounting for cash inflows and outflows have been even worse than reported total returns. In our annual "Mind the Gap" study, which estimates the gap between investors' dollar-weighted returns and reported total returns, we found that in aggregate, the returns international fund investors earned for the most recent 10-year period ended Dec. 31, 2019, continued to fall short of reported total returns by a fairly wide margin. This gap improved slightly compared with previous results, but still stood at about 1 percentage point per year, as shown in the chart below.