The pros and cons of diversifying globally

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Investors have more options than ever

When it comes to investing, is there really “no place like home?” Dorothy may have had it wrong when she said this, as there are many benefits to looking outside of your own backyard. In addition, investors now have more opportunities and more accessible investment options than ever before. Whereas past generations may have only been able to invest in their local markets – or even just in the company at which they worked – today’s investors can look across the globe to pick and choose what goes into their portfolios.

Investing abroad requires some smarts

The downside to this abundance of choice is that investors also need to be savvier than ever before. For instance, it’s important for investors to understand the basic benefits and risks of investing in a very established market like the US, versus investing in more volatile areas like emerging markets. Still, many investors can benefit from diversifying globally. Holding the stocks and bonds of companies and countries across the globe can help to grow and stabilize a portfolio over time.

Emerging markets may experience faster growth

Many regions of the world experience economic growth rates much faster than those of the US. For instance, emerging markets, whose countries are at earlier stages of economic development than the US, can grow at rates many times faster than what we experience here, but with greater risk. China, for example, had experienced significant growth over the last decade which is now starting to slow. Countries like India are emerging as newer areas of growth as well. While this is by no means a guarantee that their financial markets will rise at a similar pace, their companies may often benefit from such growth.

Holding assets abroad provides diversification

In terms of portfolio stability, holding assets around the globe often provides diversification benefits. Even if one part of the world struggles, many other places may continue to grow steadily. Thus, these different assets can offset and balance one another over time.

Investing globally can get complicated

The challenge for investors then isn’t just one of choice – it’s complexity. Investing globally is often more complex than investing solely in your own country, industry, or local market. Thus, it can be important when diversifying globally to take advantage of mutual funds, exchange-traded funds (ETFs), and similar financial products which can provide diversification in a simple and low-cost way. On the yellow brick road to financial success, it’s important to have a mix of investments within your portfolio that fits your goals.

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