Savvy investors have known for many years that small-cap stocks can be an effective way to boost long-term performance. This has been even more true for international companies than for U.S. ones.
Let’s see if the numbers back up that claim. (Hint: they do.)
The long-term evidence
In the 45 calendar years from 1970 through 2014, U.S. small-cap blend stocks compounded at 13%, compared with 10.5% for the Standard & Poor’s 500 Index, which itself is a blend of value and growth.
Data for this report comes from Dimensional Fund Advisors.
While those U.S. small-cap results are impressive, international small-cap blend stocks did even better. Over the same 45-year period, they compounded at 14.6%.
What $100 became
These percentages are easier to grasp when translated into dollars.
If you invested $100 in 1970, by the end of 2014 it would have grown to:
- $8,845 in the S&P 500
- $24,486 in U.S. small-cap blend stocks
- $45,387 in international small-cap blend stocks
In other words, investors in international small-cap blend stocks achieved more than five times the growth of investors who stayed solely in the S&P 500.
While the future will inevitably differ from the past, this 45-year span offers a meaningful comparison. It includes three major bear markets, three strong recoveries, and a long period of economic expansion.
Diversifying beyond the S&P 500
I’m not suggesting that international small-cap blend stocks should replace either the S&P 500 or U.S. small-cap blend stocks.
In my recommended portfolios, I include equal parts of these asset classes (along with several others). But for the moment, I want you to consider international small-cap blend stocks simply as a way to diversify beyond the S&P 500.
If in 1970 you had split your $100 investment evenly between the S&P 500 and international small-cap blend stocks — rebalancing annually — your compound return would have been 12.9%.
That $100 would have grown to $23,508, compared with just $8,845 for the S&P 500 alone.
If those numbers don’t make the case for international small-cap blend stocks, I’m not sure what would.
Shorter periods tell the same story
Most investors don’t invest for 45 years at a stretch, so I also examined 15-year rolling periods. There were 33 such periods during the time studied.
On average:
- International small-cap blend stocks returned 14.8%
- The S&P 500 returned 11.8%
- A 50/50 combination of the two returned 13.6%
Importantly, the risk of the combined portfolio — measured by standard deviation — was lower than that of either U.S. or international small-cap blend stocks on their own.
The takeaway
The evidence is clear: International small-cap blend stocks have been an excellent way to diversify beyond the S&P 500 Index.
Next up: international small-cap value stocks — another asset class with a similarly impressive track record since 1982.
Richard Buck contributed to this article.