Weekend Reading: Do U.S. Investors Underestimate Risk?
This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
It’s become common practice to utilize U.S. historical data when projecting the resilience of your financial plan. However, this can potentially underestimate the risk of a significant market crash, as relying solely on U.S. data may lead to an inaccurate perception of downside risk.
READ THE ARTICLEA broader scope: To examine the uniqueness of U.S. stock market performance, two of my favorite researchers, David Blanchett and Michael Finke, reference the JST Database, which combines historical market data from 18 countries. Analysis of the rolling, five-year returns shows that while global markets have generally performed well, there have been periods of significant negative returns globally.
A sunnier picture: The U.S. stock market experienced the lowest cumulative historical return globally in only a small percentage of instances. Even during those periods, U.S. returns were relatively better compared to other countries. Blanchett and Finke provide examples of specific periods like the tech bubble and the global financial crisis, where the U.S. market performed better than many other countries.
If your retirement plan is dependent on the stock market only being as bad to the downside and as good in the rebound as it has in the past, it may be time to reconsider your estimation of the risks you are taking.