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? 

The “Safe Dividend Stock” Illusion…

It is very common today to get a client or prospect asking about high dividend paying stocks.  It is perhaps even more common for many advisors today to include dividend stocks as a part of their lead pitch.  “We focus on high quality dividend paying stocks,” they might say.  This will undoubtedly lead to affirming head nods from the prospective clients.  And therein lies the problem.  This idea that high quality dividend paying stocks are a guaranteed smart investment with great upside and limited downside potential has become an axiom of sorts in the eyes of the general public.  No further data is needed; the safety of dividend stocks is self-evident.