Diversification: why going global can be a smart investing move
Most investors like to see themselves as rational players, always making decision based on sound economic information. But let’s be honest – we all have our little investing biases. One of them is that most investors prefer to put money into equities close to home, such as Americans buying U.S. stocks of the companies they see at their local stores. By doing so, however, they miss out on a world full of investing opportunities.
Over the years, we’ve seen big swings where investors who stick with U.S. stocks lose out:
- From 10/31/1995 - 06/30/2000. Europe beat the U.S. by +90.7%
- From 06/30/2000 - 12/31/2004. The U.S. outpaced Europe by +19.4%
- From 12/31/2004 - 06/30/2007. Europe won by +43.2%
- And from 06/30/2007 -02/28/2015. The U.S. has won by +44.0%
Over the total period, the returns have been strikingly similar: 399.7% for Europe and 397.1% for the U.S., or 8.23% versus 8.20% annualized, respectively. By holding both regions, the path to such returns would have likely significantly smoothed out investors’ ride.1
We believe that there are three great reasons to think global when investing:
- Take advantage of different economic conditions. We’re seeing central banks diverge, with the U.S. Federal Reserve tightening (albeit slightly) while the European Central Bank, Bank of Japan and the Bank of England are becoming increasingly accommodative – especially in light of the June Brexit vote this year. By having a global perspective, portfolios can take advantage of policy divergence and different economic regimes.
- Reduce risk. You may think that owning a basket of U.S.-based equities makes you diversified. But what if the entire U.S. economy stagnates and the best growth can be found overseas, such as in the mid-2000s? By owning equities from around the globe, you help to lower the chance that an unforeseen economic shock in a single country does real damage to a portfolio. Conversely, you put yourself in a better position to likely capitalize on a particular geographic area’s upswings.
- Find higher growth. To be honest, emerging markets still have some challenges and economic fundamentals are still negative in places like Brazil, Russia or South Africa. But we believe that these economies are the strongest source of long-term growth in a western world with aging demographics and low population growth. That higher growth potential abroad can be a significant opportunity. See an article, The Chinese economy: Still cautiously bullish, by my colleague, Brian Ingram for one such example.
In our view, a multi-asset approach that invests across a wide range of global asset classes (e.g., equities, fixed income, infrastructure companies, real estate, and commodities) that takes into account factors, such as valuation, business cycle and sentiment around them has a good likelihood of achieving one's desired outcomes.
We ourselves have taken a global approach since the late 1980’s in many of our portfolios. At points in time, that can be behaviorally difficult: we all want to hold the recent winner and that has been the U.S. for the last 4 years. But by being steadfast in our global belief, we believe that our clients may be likely to have a higher probability of meeting their goals.
It’s a big world. Investors who are willing to take a look at all of it and invest accordingly may do their portfolios a big favor.
1 MSCI Europe X UK and Russell 1000® indexes. The dates were not start of year to end of year and are for MSCI Europe X UK (EUR) vs. Russell 1000 (USD).