At this point, you’ve (hopefully) heard and heeded this advice: Don’t put all of your eggs in one basket. It’s been repeated ad nauseam that a well-diversified portfolio is the only “free lunch” in investing – which can allow you to take on less risk while possibly getting equal or greater returns.
If you have a diverse investment portfolio of domestic stocks, bonds, and even hard assets or other classes, you’re off to an excellent start for retirement or growing your wealth. Even so, many are surprised or reluctant to hear that they’re missing out on a large opportunity if they’re solely invested in the United States.
By diversifying globally, you have a chance to spread those nest eggs into baskets across the world, while also seeking further opportunities to grow your wealth. Yet in my decade of advising people on how to invest, I’ve seen that many are reluctant to diversify globally, or fail to believe it helps in our increasingly globalized world.
If you have the same thoughts or haven’t diversified globally yet, here are some points to consider.
Avoid Hometown Bias
Whether it’s buying our vegetables from a local farm or through our investment choices, many of us are inclined to go with selections that are close to our geographic familiarity. Our experiences and ease often mistakenly lead us to believe that we have “insider knowledge” and have made a better pick by going local.
As I’ve stated before, this can play out in dangerous ways in the stock market, such as when you heavily invest in the firm you work for. This also holds true when it comes to investing in the U.S. versus a country that we haven’t even set foot in.
But just because you live in the U.S., you don’t necessarily have enough knowledge to beat the stock market here, or that international investments aren’t any more attractive. The truth is that living in a country won’t give you enough knowledge to fully understand its’ incredibly complex market, or that you should discredit other countries because of it.
The U.S. Doesn’t Always Win
Just like in the recent Olympic competitions, the U.S. won’t win the gold medal every single time. A wise investor will realize that despite their penchant to invest in domestic stocks, they may not be the top winner year after year. For instance, in the last 12 years (since 2015), the best-performing stock market has been one outside the U.S. Even though you may miss some bigger American wins by concentrating your investments there, you’ll also avoid big searing losses, and possibly enjoy better overall results.
You’re Missing Out On Half The Available Investments in the world
According to Merrill Lynch, U.S. equities accounted for slightly more than half (52%) of the entire stock market. Many are unaware of how vast the investment universe is outside the U.S., and mistakenly believe they’re only missing a small piece of the pie. Even if you’re already diversified by company size or industry domestically, you can be missing out on what academics see as an even better way to further reduce your risk and boost your long-term success. These studies have found that the performances in tandem of different countries results in big reduction of risk while also increasing possible returns.
Despite Globalization, You’ll Still Enjoy Opposite Performances
Our world is becoming more globalized than ever. Just take on look at your Chinese-manufactured iPhone as you head to your Toyota Camry (which Fortune dubbed the most “American” manufactured car), and you’ll see how the world is increasingly connected.
Many also believe that exposure to solely U.S. investments is only necessary because our world is so intertwined. However, the “lost decade” (2000 to 2009) is just one example where global markets performed almost the exact opposite of the U.S., and you would’ve benefited from their exposure. While the S&P 500 had a negative annualized return during that time, international markets benefited from 1 to almost 10% returns.
The Bottom Line
Although you may not understand all the factors surrounding the global economy, diversifying this way can have significant benefits for your portfolio. Consider speaking to a trusted advisor, or tilting your portfolio towards diversified international stocks. There isn’t a “magic” number of the percentage you should allocate to any investment (because everyone has unique needs and goals) – but it’s a smart idea to base this on your appetite for risk, and the likelihood that you’ll actually stick to your investment plan when international stocks are thrown into the mix.
Just like everything else in life, it can be worth it to expand your horizons.
This article was written by Forbes Finance Council from Forbes and was legally licensed through the NewsCred publisher network.
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Forbes Finance Council