Wouldn't it be great to capture the returns of the top-performing investments in any given year? That's a dream that many investors and traders share, but typically, they miss the mark because their security selection is too narrow.
Plenty of stocks you've never heard of notch strong gains in any given year, causing investors to wish they had only heard about that particular opportunity. For example, Interlink Electronics (LINK), a thinly traded U.S.-based maker of sensors used in a variety of electronics, trades on over-the-counter markets and leapt more than 200% so far this year.
That's great performance for anyone who bought this low-priced stock in January and held it. But picking a previously unknown stock and being rewarded with a big payday doesn't happen often. And betting purely on individual securities is inadvisable for anyone saving for a specific financial goal.
In that case, a thoughtful strategy of asset allocation is likely to beat stock picking, over time. Even during time periods when a bet made on single stocks beats an allocated portfolio, there is still added risk that can come back to bite when the next downturn inevitably occurs.
So what about trying to lock in the gains from the best performing overall asset class? Most Americans consider that question in the context of big U.S. stocks, typically the S&P 500 index. Year to date, that index is up around 18%. Not bad, and investors would not turn their noses up at that kind of performance.
But is that the best? What if you could eke out an even greater return, but choosing some other investment that outperformed the S&P 500? Isn't that what the whole game of beating the market is supposed to achieve?
If you owned precious metals, real estate investment trusts, or funds tracking the technology, industrials, communications and consumer discretionary sectors, you would have a greater return than an S&P index fund right now.
However, that's just data for asset classes and sectors. What about countries?
Well, if you'd had the foresight to choose investments from Greece, Romania, New Zealand, Italy, Bosnia and Herzegovina, and Shanghai? Those, as well as a handful of other global markets, performed as well as or better than the S&P 500 this year.
Researching the performance of global capital markets reveals the folly of trying to pick the very best investments, to the exclusion of all else. Some of those markets are small, obscure and risky, and are unlikely to be at the top of any U.S. investor's watch list.
But that doesn't mean you shouldn't own them at all. Expanding the definition of "the market" to include global stocks opens up a world of opportunity beyond domestic securities. To own top-performing equity asset classes in any given time frame, it's almost always best to include non-U.S. companies.
From 1999 and 2018, the U.S. was the top-performing developed market only once, in 2014. That doesn't mean performance was necessarily bad in all the other years; it just means other nations' stock markets did better.
In the last four years, the top-performing development market was Denmark (2015), Canada (2016), Austria (2017) and Finland (2018).
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Emerging markets often outperform to an even higher degree, although they bring more risk. Wouldn't it be great to own those top-performing markets, whether developed or emerging?
The top performing emerging market in 2018 was Peru, which has a positive return of 1.8%. The overwhelming majority of emerging and developed markets turned negative in the fourth quarter of 2018, erasing the prior three quarters' gains.
Peru's success in 2018 highlights the folly of trying to identify a single market or investment that will outpace others. Peru comprises a small portion of the Morgan Stanley Capital International Emerging Markets Index, a common benchmark for emerging market stocks.
Sure you could have purchased the iShares MSCI Peru exchange traded fund (ticker: EPU) but would it even have occurred to you? It's an extremely thinly traded ETF, which would have added more risk to already emerging market stocks that are already prone to volatility.
In the prior three years, the top performing emerging markets were Hungary, Brazil and Poland. Frequently, the top-performing emerging market will outperform the best developed market in any given year. However, those markets can also underperform by huge margins as well.
For investors willing to hang on through thick and thin, that can be rewarding, but those with a penchant for trading may find themselves selling out just before a positive turnaround.
Clearly, a laser focus on any one market, whether developed or emerging, is not a reasonable way to generate a top return in any given year.
Certainly, it would be great to own those top performing markets, whether developed or emerging. How can that be done, while avoiding the futile exercise of picking stocks or funds?
Fortunately, it's easier than ever to diversify into non-U.S. securities, using mutual funds or exchange traded funds. In the past, it was difficult for American investors to purchase stocks traded on overseas exchanges, but that obstacle has disappeared.
When you purchase non-U.S. funds, don't just jump willy nilly into whatever performed well last year.
As with any basket of investments, be sure your global funds fit into your plan. They need to align with your risk tolerance and financial goals.
In addition, it's important to maintain a global allocation at all times, and not sell out of an asset class just because it's performing poorly. As the rotation in the developed market stocks shows, you can never predict what will be a leader or laggard in any given year.
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