After a poor 2018, global stock markets, as a whole, produced strong gains in 2019. On the back of more accommodative monetary policy from major central banks across the world, and optimism that the trade war situation may finally be resolved, stocks had one of their best years since the Global Financial Crisis.
That said, if you only own FTSE 100 stocks (as I’m sure many UK investors do due to what’s known as ‘home bias’), you may be a bit disappointed by last year’s performance. You see, in 2019, the FTSE 100 produced a return of just 12% plus dividends, which compared to the returns of other major stock market indices such as the S&P 500 (29% plus dividends) and the STOXX Europe 600 (23% plus dividends), is actually quite low.
So why did the FTSE 100 produce such underwhelming returns compared to other stock market indices last year?
One of the main reasons the FTSE 100 underperformed last year is that many of the companies that have large weightings in the index are struggling for growth right now and this is reflected in their share price performances.
For example, some of the largest holdings in the Footsie are the oil majors Royal Dutch Shell and BP, and global bank HSBC. Together, these three companies make up a large chunk of the index. Now, last year, the share prices of all three of these companies ended lower than they started. That will have created a huge drag on the index.
By contrast, the largest holdings in the S&P 500 index include the likes of Apple, Microsoft, and Amazon. These three companies are all growing at a rapid rate and this is reflected in their share prices. Last year, Apple shares rose nearly 90% (Warren Buffett will be happy as it’s his top stock), while Microsoft and Amazon shares rose around 55% and 23% respectively. It’s these kind of strong performances that will have turbocharged the main US index.
Of course, Brexit will have also impacted the FTSE 100’s returns throughout the year. Despite the fact that many companies in the index are multinationals that generate a significant proportion of their revenues internationally, many global investors will have steered clear of UK equities due to the high level of economic and political uncertainty here in the UK.
Home bias can hurt your returns
Ultimately, the FTSE 100’s poor performance last year shows how important it is to avoid home bias, and diversify your portfolio properly.
If you only owned a FTSE 100 tracker fund, or a handful of FTSE 100 stocks last year, your overall returns would have been quite underwhelming. However, had you owned a diversified portfolio that included exposure to international equities last year, chances are, your returns would have been far more impressive.
Having a strong home bias is one of the biggest mistakes that investors make. If you’re reviewing your portfolio as we start the new year, now’s a good time to make sure you’re fully diversified.
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Edward Sheldon owns shares in Royal Dutch Shell, Apple, and Microsoft. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon, Apple, and Microsoft. The Motley Fool UK has recommended HSBC Holdings and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.