Some of us at River Capital Advisors, L.C. are big fans of college football. If you follow college football closely like us, you likely will have already heard experts talking about who will win the national championship this coming season. Predicting the next national champion in college football may seem like it has very little to do with investing, but it can teach us some important lessons.

Recent Champions

If you tried to predict who would win the national championship, you might start by looking at who performed the best over recent history. Since 2009, one university stands out above the rest. The University of Alabama football team has appeared in the championship game five times and won in four of those appearances. During this time period, Alabama has had dozens of players drafted into the NFL and head coach Nick Saban has asserted himself as arguably the greatest coach in college football history. The performance of the team cannot be disputed (much to the chagrin of their closest rival, Auburn University).

Like the Alabama football team, the track record of the U.S. equity market (and the S&P 500 index in particular) has been impressive since 2009. Since the market bottom in March of that year, the S&P 500 index has returned 16.95%¹ on an annualized basis. Over the same time period, international and emerging markets have returned 10.17% and 9.49%¹, respectively. If you started investing in international or emerging markets in more recent years, the returns were not always so palatable. Just as Alabama boasts a team full of future NFL players, the S&P 500 consists of the most highly sought-after companies like Amazon (AMZN), Alphabet (GOOG), and Facebook (FB). When you look at recent history, it is no wonder the financial press has been giving U.S. equity markets a lot of love.

Past Performance is No Guarantee of Future Results

While recent history has been very good for the Alabama football team, things did not always look so bright. Before 2009, the last time Alabama won the national championship was 1992 – a drought of seventeen years. Just as Alabama fans may be quick to forget their seventeen year title drought, some investors who allocate their investments only to the U.S. are quick to forget the Lost Decade. The Lost Decade was the time period from 2000 to 2009 bookmarked by two recessions in the U.S. The S&P 500 index returned -9.10% during this time. Meanwhile, world markets as shown by the table below had returns far superior to the U.S. Where would you rather have been invested during the Lost Decade?

A World of Opportunity

The University of Alabama has had a lot of success compared to other college football programs, yet it is still only one of 128 colleges and universities in the NCAA Football Bowl Subdivision. Any one of these schools can be crowned the national champion in any given year (we will admit that for any team outside of the top 25 in college football, this is far more unlikely). In fact, over the past twenty years, a university not named “University of Alabama” has won the national championship 80% of the time.

Something similar can be said for the U.S. The U.S. represents only about half of the overall global equity markets. If you chose to invest in only the U.S., you would miss out on the opportunity to invest in great companies such as Nestle (NESN.VX), Siemens (SIE.DE), Unilever (UN), and Sony (SNE). Since 1997, the U.S. was the top performing country in any given year only one time (2014) while Finland was the top performing country four times (1998, 1999, 2007, and 2013). In fact, among twenty-one of the most developed markets in the world, five countries were at the top at least twice over this time span (Canada, Finland, New Zealand, Sweden, and Switzerland). The U.S. was able to crack the top three only four times (2008, 2011, 2013, and 2014).

The Lesson: Diversify Your Investments

If you try to pick which region will be the top performer in any given year, you will find this is a game that you can almost never win. The best thing an investor can do is diversify their portfolio by selecting investments both in the U.S. and abroad. By investing in a globally diversified portfolio versus a concentrated portfolio, you have a much better chance at capturing the best returns, no matter which region they come from. Of course, there will be times that your portfolio contains a “losing team,” but sufficient diversification can help balance out the winners and the losers thereby reducing the chances that you experience a losing streak.

River Capital Advisors, L.C. uses globally diversified portfolios for our clients. If you would like us to review your investment portfolio and provide a free second opinion, please contact us.

Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Diversification does not eliminate the risk of market loss. There is no guarantee investing strategies will be successful. International investing involves special risks such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks.

¹Source: Morningstar Direct®. Returns for the S&P 500 index are from March 31, 2009 to May 26, 2017. Returns for international and emerging markets are represented by the MSCI EAFE and MSCI EM indices, respectively, from March 31, 2009 to May 26, 2017. 

²Source: MSCI data © MSCI 2016, all rights reserved.