But as we know now, those sizzling foreign gains didn't last. In fact, investors have done far better in the 1990s by sticking with U.S. stocks. This doesn't mean that all investments go through five-year cycles of first dazzling gains and then tawdry results. But there is a lesson here for those who flock to yesterday's winners while dismissing the laggards as unsuitable for investing. Historically, small caps have done well, but it's based on long holding periods.
People are much too short-term oriented.
Today, investing in smaller U.S. stocks, emerging markets and Japanese shares is viewed as almost imprudent. Yet if U.S. large-company stocks post disappointing results in the years ahead, these downtrodden areas could bolster your portfolio's performance. Indeed, if you are investing for a decade or more, which is the sort of time horizon you should have if you are buying stocks, diversification can mean the difference between making decent money and failing to meet your investment goals. Sure, U.S. blue-chip stocks have topped the charts in the 1990s. But the 1980s were a great decade for foreign shares and the 1970s belonged to small U.S. stocks.