Weekly Market RecapThis week saw mixed housing and good jobs data in the US. Europe saw further progress on the Greek bailout. Various US firms reported quarterly earnings. Declines from companies including IBM, Caterpillar and Microsoft on weaker than expected results offered a timely reminder on how stock picking can potentially lead to a volatile portfolio. With bad headlines from Russia, Greece and China in recent months it can be tempting to shy away from international diversification in favor of a US-centric portfolio. But, did you know that Russia and China, despite their volatility, are among two of the best performing markets in dollar-terms so far in 2015? They are both up over 10% respectively this year. This comes at a time, when certain US benchmarks, like the Dow, are now in negative territory for the same period. Of course, Greek stock markets have been weak, but Greece remains a very small part of the European stock market which is, in aggregate, ahead of the performance of US stock markets year-to-date. So actually, many of the regions you might expect to be dragging down an international portfolio, given recent panic inducing headlines, are actually helping it this year. Nonetheless, what has been a drag on international portfolios over the past year has been the US dollar. The dollar has risen approximately 14% against a trade-weighted basket of currencies over the past 12 months. This is a drag on foreign returns, especially for stock markets in Australia, Canada and the UK recently. Perhaps more importantly, currency moves have a tendency to be self-correcting over the medium term for your portfolio. This is because of how flows of exports react to currency moves. A strong dollar generally makes US exports more expensive. This has the effect of helping foreign firms as their exports grow and hindering domestic firms. As such, we believe the stronger dollar may signal better growth prospects for stocks outside the US in future. In fact, many US companies have mentioned the headwind of a strong dollar as they reported earnings recently. Overall, whether the US or foreign markets perform better depends on the time period you look at. Historically, foreign developed markets outperformed the US in the 1970s, 1980s and 2000s, but lagged in the 1990s and in the past few years. Yet, with our investment approach the goal is not to pick a single winner, but rather combine countries in your portfolio for lower volatility. Looking back to 1970, our analysis shows that an internationally diversified portfolio has consistently been lower risk than holding any region or country in isolation. Finally, remember that the US market currently may be relatively expensive relative to both other countries and its own history on a medium-term basis. It has a cyclically adjusted price to earnings ratio of 27 currently. Most would agree that that is high relative to history. Though we don't believe it's possible to predict the markets in the short term, this relatively high US valuation is another reason why we believe that long-term investors be internationally diversified. Disclaimer: Your Portfolio Summary
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