As follow-up to our prior piece about your neighbor’s returns winning last year, we have a simple historical comparison of our typical portfolio against two benchmarks: the S&P 500 and a global index portfolio. Take a look.

2014 may go down in financial history as the year that globally diversified investors like us lost. Your neighbor and most other investors won, and they did so with their concentrated, US Large cap portfolio. Large U.S. companies enjoyed a double-digit year, while other markets experienced negative or mediocre results, especially for international, emerging market and small-cap stocks. In a recent article from Larry Swedroe, he points out that this is a great test of our investment temperament.

Although the U.S. S&P 500 Index has outperformed the MSCI EAFE (international stock) Index since 2010 by an annualized return of around 9 percent, the MSCI EAFE happened to deliver about the same outperformance in reverse from 2002–2007. Clearly, the tables can turn abruptly and destructively for the nondiversified investor. As Swedroe says, “Diversification is like insurance. It’s insurance against having all your eggs in the wrong basket.” Remember, a year is just a year in a multi-decade investing journey, which is why we always say, “Take the long view.”

[See our follow-up post for additional data.]

How do you beat inflation without stock picking and market timing? You get exposure to systematic sources of excess return, a.k.a. premiums. This is one of our favorite slides because it highlights the premiums that savvy investors want exposure to, going back to 1927. Get low-cost, diversified, tax-efficient exposure to these factors, take the long view, and you’ve put the odds firmly in your favor.