Author: Laurent Boumaza, CFP®
Reflecting on the past and thinking about the future are crucial steps in setting goals and establishing new plans. This is especially true for investors navigating the market noise and trying to anticipate the best course of action.
As we review the events of 2021 and look forward to 2022, it is necessary to remember that including global exposure is essential for investors. Global exposure provides excellent investment diversification, and looking at past patterns and the future of global investment exposure shows us why it is a vital component of your investment strategy.
Past patterns and global investment exposure
Global stocks showed mixed performance throughout the end of 2021. They declined in September, recovered in October, retreated again in November, and rebounded in December to end the fourth quarter with robust gains. This volatility was partly due to news and worries about new virus variants, supply chain disruptions, and more.
As a result of these concerns, emerging markets stocks declined modestly for the full year. However, international developed markets were up nearly 13% by the end of the year. Data is not always conclusive, so you should always take new information with a grain of salt.
Data as of 12/31/2021. Performance in USD. Past performance is no guarantee of future results. Source: FactSet.
U.S. Equity, International Developed Markets and Emerging Markets Equity style boxes are represented by Russell, MSCI World ex USA and MSCI Emerging Markets indices, respectively.
After short periods of poor returns or increased volatility, you may be tempted to try timing the market or abandoning your long-term asset allocations. Buying and selling based on news and current events may sometimes make sense, but it is impossible to predict and time future market activity perfectly.
However, we can observe from past patterns that the ebb and flow of the U.S. and global markets tends to be complementary: when the U.S. market is flat, the global market typically is not, and vice versa. Considering the future of global markets in your investment plan is crucial.
Looking to the future of global investment exposure
Hindsight makes it seem deceptively easy for an investor to make the right investment decisions in advance and stick with them to the end of a planned time horizon. However, as we already established, you can never make perfect market predictions and investment decisions. Instead, long-term patience is key to outlasting risks and market volatility.
Take a look at this figure by Avantis Investors from a recent ETF Field Guide to see this concept in action:
This chart helps demonstrate how the probability of losing money on an investment decreases over time, even with a 25% volatility investment. Over a 20-year time horizon, there is a less than 5% chance of a negative outcome for both types of investments based on an assumed level of return and volatility.
While international markets may have appeared relatively volatile for the past year, it is necessary to remember that stock prices and interest rates are forward-looking. The price you pay as an investor typically accounts for these forward-looking expectations. While prices can fluctuate, you can expect future returns over an extended time horizon.
Keeping this in mind, having global exposure is highly recommended because of the many benefits of diversification.
Diversify your investment portfolio with global exposure
Investment diversification can help reduce the probability of negative outcomes. The previous figure showed how this probability decreases over a longer time horizon, but this prediction differs between investments with different volatilities. This helps explain why concentrating your asset allocation in a single stock or sector is not recommended.
Diversifying within the U.S. market is possible, as there are hundreds of stock options available to provide diversity in stock positions, industries, and asset classes. However, global diversification allows you to take advantage of even more growth opportunities.
There are many trade-offs and factors to consider in asset allocation and portfolio construction. It can help to discuss these considerations with your financial advisor to understand the best strategy for your situation and time horizon.
Ultimately, your personal investment strategy should be as diversified, tax-efficient, and cost-effective as possible while remaining customized to your circumstances, wants, and needs. Reach out to your CERTIFIED FINANCIAL PLANNER™ at Oakwell to learn more about devising a plan that works best for you.