Don't Invest In America Only: Why Financial Experts Say It's Time To Diversify Globally
One of the core principles of a successful investment strategy is to diversify your holdings for greater balance.
This applies not only to different asset types (e.g. stocks, bonds, funds, real estate) but to different geographic regions as well.
Here’s a look at why you shouldn’t invest in only America, but diversify your holdings globally.
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What Is Global Diversification?
Diversifying globally simply means putting part of your money into assets based outside of your home country. The idea is to ensure that your portfolio is not overly dependent on any single region or economy — including the United States.
As Vanguard noted, global diversification can take many forms, including buying stocks, bonds, mutual funds or ETFs in foreign markets.
Focusing solely on domestic investments means putting money into companies and entities within your own country. While this can bring a certain degree of comfort, it also puts you at a disadvantage if that country’s economy and stock markets suddenly go south.
Vanguard recommended that you put at least 20% of both stocks and bonds in international investments. To get the full diversification benefits, however, consider investing about 40% of your stock allocation in international stocks and about 30% of your bond allocation in international bonds.
Benefits of Global Diversification
Here are three reasons diversifying your portfolio into more foreign assets can pay off, according to HSBC.
Risk reduction: Global diversification spreads investments across different geographic regions and lessens your reliance on any one market or economy. When one market struggles, investments in other markets can offset any losses.
Access to broader opportunities: When you diversify across different countries, you gain access to markets that might not be available in the U.S. For example, emerging markets present growth opportunities not found in many developed markets.
Currency diversification: Another benefit of global diversification is that you get protection against currency fluctuations, providing a hedge against the depreciation of any single currency. For example, if the U.S. dollar weakens against other currencies, you might see an increase in value in euros or other foreign currencies.
Risks of Global Diversification
The main risk of diversifying globally is that other countries might not match the steep returns investors have enjoyed with U.S. stock markets. This has definitely been the case since 2010, amid soaring gains in the S&P 500, Nasdaq and Dow.
“If you were to look back over the past 15 or so years, you’d really have to squint to see the case for non-U.S. in a portfolio,” said Christine Benz, director of personal finance and retirement planning for Morningstar.
However, she also added that this year there’s been a “slight risk reduction benefit” to including non-U.S. investments in your portfolio.
Another risk is that you’re investing in countries you might not have much familiarity with financially, politically or economically. Uncertainty is usually the enemy of smart investing.
At the same time, it helps to keep in mind that uncertainty can also apply to U.S. stock markets — as evidenced by this year’s extreme volatility, driven by everything from inflation and tariffs to the Iran war.
“No single country stays at the top every year,” Assembly Wealth noted in a blog. “Markets change, economies go through cycles and different countries take the lead — often in ways we can't predict.”
How To Get Started
If you’re new to diversifying into global investments, below are some ways to get started, according to Commons Capital.
Global and International ETFs: These are a “fantastic tool” because a single investment provides “instant diversification” across hundreds or even thousands of companies in different countries.
Mutual Funds: Actively managed international funds give you access to a portfolio manager who “lives and breathes global markets.”
American Depositary Receipts (ADRs): With ADRs, you can buy shares in foreign companies directly on U.S. stock exchanges, just as you would with a domestic stock.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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