It’s safe to say that most American investors stay within U.S. markets when it comes to their investing portfolio. While U.S. stocks are generally able to achieve a safe ROI in a lifetime of investing, it is always a smart idea to increase diversification of your wealth and you will likely see a greater return from international funds.
Importance of Diversifying
Academic research has repeatedly shown that more optimal investments are seen when asset classes, sizes of businesses, industries, and asset orientation with value and growth stocks are widely diversified. There is also the consensus among academics that having over 50% of equity in stocks in any single country is dangerous when considering the long-term possibilities. History has shown us that even in strong economies unforeseeable headwinds can occur.
Markets have always shown volatility in every part of the world, and the U.S. is no exception. There are often significant periods of time where international stocks do outperform those in the U.S. In fact, in the 10 years between 2000 and 2009 a compound annual loss of 0.9% occurred according to the Standard & Poor’s 500 Index. In that same period, international returns for assets classes ranged from 1.2% to 12.8%. This goes to show that if someone had only invested in large-cap U.S. stocks, it’s safe to say they would have been more disappointed than someone who chose a mixed market with both international and national stocks.
Another safety net to be conscious of is the diversification of currency. Investing in unhedged international funds will help achieve this. While sometimes it’s a toss up for American investors to diversify their currency if you are analyzing from a short term perspective, the long run will reduce both volatility and risk.
What about U.S. Multinational Stocks?
Other American investors may believe that their international exposure will increase enough through just their U.S. multinational stocks. However, it’s really only true if your perspective is focused on large-cap growth stocks within developed countries. If that’s the case, then your exposure to value, small-cap, and emerging markets becomes very limited.
Over half of global market capitalization is located outside of the United States, and over time international stocks may outperform or at least match those in the U.S. Those that do choose to invest in international markets should realize that equity portfolios containing 50% of stocks that are international will generally see varying returns when comparing to the S&P 500. At times it will be positive returns and other occasions will bring less fortunate returns, it’s simply the nature of the varying markets on a global scale. In the end, investing internationally opens up options available to you at a lower cost.
It can be intimidating to invest outside of U.S. markets if you haven’t already done so. But when assets are analyzed correctly with the outside assistance, your investments can strengthen and diversify your wealth portfolio, leaving you feeling safer in the end. Our law group has had years of experience with international investment.
In order to effectively invest internationally, you will need to engage an investment advisor who is associated with an advisory firm. Such individuals are regulated and control access to equity markets. Before investing internationally, especially in start-ups, it is necessary to comprehensively look at international law, the target country’s law, and the global tax consequences of your options. Let us help you navigate uncharted waters.