This Will Scare You Silly

Want to see something very scary?

Index Fund

10-Year Annualized Returns

Vanguard 500 Index (VFINX)

5.8%

Vanguard Total Bond Market Index (VBMFX)

5.7%

Source: Morningstar (through 1/28/08).

Holy crap!
It would have been hard to believe back in January 1998 that a stock index tracking America's largest companies -- Wal-Mart (NYSE: WMT  ) , Boeing (NYSE: BA  ) , Disney (NYSE: DIS  ) , Pfizer (NYSE: PFE  ) , et al. -- would beat a lowly bond index by just one-tenth of a percentage point over the next 10 years.

But it would also have been tough to imagine back then that American icons such as Coca-Cola (NYSE: KO  ) , Xerox (NYSE: XRX  ) , and Eastman Kodak (NYSE: EK  ) would be trading lower 10 years later.

As if you weren't scared enough ...
Unfortunately, the days of the S&P's posting regrettable 10-year returns may just be beginning. For instance, if the S&P 500 fails to reach its March 2000 high close of 1,527 by March 2010 (a 12% gain from here), the index will have posted negative 10-year returns.

Moreover, to achieve its historical 6% annual return from March 2000, the S&P will need to more than double (reach 2,734) over the next two years. That is, in a word, unlikely.

A tall order
As scary as the current and potential 10-year returns for the S&P sound, investors who added international stocks to their portfolio in 1998 have still come out ahead.

Index Fund

10-Year Annualized Returns

Vanguard Total International Stock Index (VGTSX)

9.4%

Vanguard Emerging Markets Index (VEIEX)

15.1%

Source: Morningstar (through 1/28/08).

While past returns can't predict future results, the benefits of diversifying your portfolio with international stocks become obvious when you look at these statistics.

Hypothetical Portfolio

Weighted 10-Year Annualized Returns

100% S&P 500 Index

5.8%

70% S&P 500 / 30% Total International

7.0%

70% S&P 500 / 20% Total International / 10% Emerging Markets

7.9%

As you can see, just adding a little international flavor to the portfolio would have improved your 10-year returns quite nicely.

Be prepared
If the past 10 years' returns for the S&P 500 don't scare you into giving international stocks a second look, I'm not sure what will.

This isn't to say that the U.S. markets won't post solid returns over the next 10 years. It's just that the tremendous growth opportunities available overseas could not only boost your long-term returns but also reduce your portfolio's overall risk.

If you need some guidance navigating the sometimes-murky international waters, Fool senior advisor Bill Mann and his Motley Fool Global Gains team can help. Bill and the team scour the globe for stocks that could end up among the best stocks of the next 10 years.

You can look at all of the past and present Global Gains recommendations with a free 30-day trial to the service. There's no obligation to subscribe.

Fool contributor Todd Wenning recommends the book Into the Wild to those who haven't already read it. He does not own shares of any company mentioned. Coca-Cola, Wal-Mart, and Pfizer are Motley Fool Inside Value picks. Disney is a Stock Advisor choice. The Fool's disclosure policy keeps on rockin' in the free world.


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