Thursday, April 23, 2015

Understanding Investor Bias: International Markets Edition

Last year was a very clear example of how investors can be blinded by biases.  2014 was unique in that most major equity markets performed well below average except for the U.S. large cap market (as measured by the S&P 500).  The S&P 500 was up 13% last year while international markets were negative and very little else returned more than about 4%.  Many investors immediately became nervous over their portfolios.  Some even mulled over the idea of completely getting out of anything outside the U.S.  There were a lot of strong reactions to just a single year of performance.

Every year out of all the major assets classes there is going to be a top performer and a bottom performer.  It is rare that anyone ever questions why they did not own only the top performer.  No one knows which asset class will be the best performer on any given year, and it is universally agreed that diversification can help reduce risk and increase long term return.  So why did last year seem to get some investors so riled up?