In-depth research from T. Rowe Price’s Portfolio Construction Solutions team found that model portfolios used by financial professionals may be underweight international equities. Additionally, many financial professionals fail to broadly diversify their international equity allocations. Our research suggests that diversifying international equity allocations across regions, investment style, and market capitalization have historically improved returns, efficiency, and consistency. After an extended period of U.S. outperformance, now may be a good time to revisit the investment allocations in client portfolios and take a closer look at international stocks.
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Batting Average: The number of months where the portfolio outperformed the index, MSCI EAFE.
Sharpe Ratio: An investment measurement that is used to calculate the average return beyond the risk-free rate of volatility per unit.
Standard Deviation: Indicates the volatility of a portfolio’s total returns as measured against its mean performance.
Risks: Investing involves risk, including loss of principal. Diversification neither assures a profit nor eliminates the risk of experiencing investment losses. When valuations fall and market and economic conditions change, it is possible for both actively and passively managed investments to lose value.
International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates and differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for investments in emerging markets.
Stocks of mid-cap companies entail greater risk and are usually more volatile than the shares of larger-cap companies. Stocks of smaller-cap companies generally have been more volatile in price than larger-cap stocks. Value and growth investing styles may fall out of favor, which may result in periods of underperformance.
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