Q: Last year I moved my balance to Vanguard funds to mimic your long-term asset allocation strategy. I just noticed that Vanguard Developed Markets (VTMGX) and Vanguard FTSE International Small Cap (VFSVX) lost value over the last year. I think your long-term strategy based on analyzing past decades of data is sound, but I am wondering if you think the poor international performance is just a blip in the long-term strategy or has something fundamentally changed with those funds?
A: One year has little to do with the long-term return of an asset class. In my “Understanding Performance” series on MarketWatch, I discuss the best of times and the worst of times for all of the major asset classes. The last 15-year period was one of the worst for U.S. large cap blend (S&P 500) and international large cap blend. Both produced less than 5% compound rates of return. Does that mean it’s time to get rid of these two previously productive equity asset classes? Both of these asset classes also struggled for the 15 years ending 1974, with almost the same returns as the last 15 years. For the 15 years following 1974 the S&P 500 compounded at 16.6% and the international large cap blend at 20.6%. For the U.S. and international small cap indexes, 1975 through 1989 returns were 23.1% and 31.5% respectively.
One of the biggest challenges for investors is trusting their investments after a period of poor performance. I have done all I can to protect you against long-term underperformance by recommending massive diversification across many highly profitable asset classes. As I’m sure you are aware, other U.S. and international equity asset classes made 50 to 100 percent more than large cap blend over the last 15 years.