In our last article, we noted that international factors are very much on investors’ minds as they look toward 2017. According to a recent Morgan Stanley survey, four of investors’ top five concerns for this year arise from global trends. We took a brief look at some of the chief risks that US investors must consider when they invest internationally.
So . . . should investors in the United States even bother with global markets, given the various uncertainties? At Bernhardt Wealth Management, we strongly believe that the answer, for most investors, is “Yes.”
Why do we take this position? Let’s take a look at some of the principal rewards of carefully selected global investments.
Reward #1: Greater Diversification. Remember, the US market represents only about half of the global opportunity. Ignoring such a large proportion of the investment universe means giving up tremendous opportunities to broaden the financial foundation of a portfolio. Often, when domestic stocks are under pressure, investments in other parts of the world can be enjoying a bull market. International investing, as part of a well-conceived diversification strategy, can provide important downside protection for times when our own national economy is flagging.
Reward #2: Growth Potential. Everyone knows that buying low and selling high is the market ideal. For that reason, analysts often look to emerging markets–rapidly developing economies in places like Vietnam, Indonesia, or India–because of their potential for higher returns than in more mature, settled markets. According to a January 2017 report from Dimensional Fund Advisors, global equity markets advanced at a significantly higher rate than US markets (2.63% vs. 1.9%). Additionally, emerging markets (places like China, Indonesia, Brazil, and India) outperformed both US and other developed markets, with an aggregate return of 5.02%, compared with 3.01% and 1.90%, respectively.
Reward #3: Reduced Volatility. This benefit may sound surprising to some, especially in light of concerns about emerging markets and the risks inherent to them (see our previous article). But it actually makes sense when we consider the benefits of greater diversification, as outlined above. We often use the Callan Periodic Table of Investments as a key visual aid to demonstrate to our clients that no single asset class–including US stocks–is always the top performer. Various types of assets will produce better or worse yields at any given time, and often the sectors represented by these assets move in uncorrelated ways. For this reason, owning investments in less-related areas–including different global market sectors–distributes an investor’s risk of being harmed by a downturn in any single sector, thus reducing overall volatility. Recent studies have shown that investing as little as 10 percent of a portfolio in global equities can have a significant long-term “smoothing” effect on swings in portfolio value.
As with any investment strategy, international investing should be undertaken only after careful consideration of the risks and assessment of your financial goals. You should especially discuss with your financial advisor ways that you can limit the transaction costs associated with foreign investment. An experienced and qualified professional advisor can help you decide how and when international investing should figure in your overall investment strategy.