Embracing a Global Stock Market

Embracing a Global Stock Market

U.S. stocks have significantly outperformed international stocks in recent years. And U.S.-based multinationals are major players in the world economy. Does that make international stock diversification unnecessary? Not at all.

International stocks represent 44.9% of the global market – a figure too large to ignore. So by owning international stock investments, you can diversify your portfolio and take advantage of opportunities by leading companies in emerging and other developed stock markets.

Three reasons to invest internationally:

1 Changing market leadership

The rationale for diversification is clear. U.S. and international stocks often swap positions as performance leaders. It wasn’t that long ago that international stocks led the way over domestic stocks, as shown in the figure below. What might the future hold as leaders potentially turn to laggards? Global diversification gives you a chance to participate in whatever region is outperforming at a given time.

2 Positive international outlook

U.S. stocks have had a great run, but will that continue? From a U.S. investor’s perspective, the expected return outlook fro non-U.S. stock markets over the next 10 years is 8.4%, higher than that of U.S. stocks (5.1%).

3 Volatility reduction

Having a mix of international and U.S. stocks has historically tamped down the volatility in portfolios, as shown in the figure at right. Of course, it’s natural to be concerned about geopolitical risk, but having a mix of U.S. and international can actually reduce portfolio risk. It’s true that correlations have increased between U.S. and international markets as globalization has taken hold, but including international stocks in your portfolio still carries diversification benefits because of less-than-perfect correlations due to differences in economic cycles, fiscal and monetary policies, currencies, and sector weighting.

U.S.-headquartered multinational corporations alone don’t provide enough exposure because a big chunk of the world economy is still driven by companies with headquarters outside the United Stages. You may also lose the potential diversification benefit fo foreign exchange. That’s because many U.S. multinational films seek to smooth their revenues by hedging their foreign-currency exposures.

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