Should I Invest in International Stocks?
Seventeen seconds left, it’s game six of the 1998 NBA finals between the Chicago Bulls and the Utah Jazz, with Chicago trailing Utah 85 to 86. Who do you let take the last shot? Ron Harper? If you watched “The Last Dance,” the 10-part documentary series
that aired on ESPN recently, then you’re probably screaming Michael Jordan. But are you sure?
Yes, you’d be right. But recall that before Jordan hit that last-second shot to win game six in spectacular fashion, he airballed the potential winning shot in game five, missing 20 shots altogether. And those aren’t the only shots Jordan missed in his career. In fact, he’s been quoted as saying he missed more than 9,000 shots, lost over 300 games, and 26 times was trusted to take game-winning shots but missed.
If in the final seconds of game six you want to give the ball to the player with the best in-game shooting percentage during that contest, then you may be relying on the fact that even though Harper made a solid three out of four shots that night, he only made 44.6% of his shots on average over his career. On the other hand, Jordan made 49.7% of his shots on average over his career. Evidence suggests Jordan was the better option.
Assuming that Harper’s “hot” streak would make him a better choice for taking the game-winning shot is a classic example of the “hot-hand fallacy,” which is the belief that recent superior performance will improve the future odds of success. This phenomenon plays out in sports constantly—is it happening with your investments, too?
The belief that streaks have predictive power is an illusion that can cause investors to make poor decisions. For example, U.S. stocks outperformed their international counterparts by 8.1% last year. Are you going to buy only U.S. stocks and avoid international stocks the next time you add money to your account? That might prove to be a rash decision, as year-over-year performance between the two asset classes for the longer period since 1972 skews only slightly toward the U.S. at 52.1% of the time. Or will you remember that just because an asset class performs at the top of the list one year
doesn’t mean it won’t be at the bottom of the list the next year? And, perhaps like what might have happened had you chosen Harper over Jordan in game six, if you miss, you could miss badly. The biggest out-performance by U.S. stocks over this period was 32.2%; it was even higher for international stocks at 48.6%.
The rapid market decline in March and subsequent rebounds have many investors wondering if 2020 will be an up or down year for 2019’s winning asset classes. Maybe things will look similar, and maybe they won’t. But understanding how the hot-hand fallacy can affect sports and financial decisions alike may help keep you from making unnecessary changes to your long-term plan.
