Investors in the US tend to have a home country bias when choosing which stocks to include in portfolios. However, including international markets in your investment plan is a sensible move. Read this resource to better understand why.
Investing in any market can be unpredictable
The United States markets have been doing well, which may strengthen investor bias towards US stocks. However, while it is possible to make informed guesses about which stocks will perform well in the future, these predictions are never perfect.
For example, compare the performance of the US, non-US, and emerging markets in the chart below. If you look at the past 5-10 years, US stocks appear to be the clear winners. However, over 20 years, emerging markets outperformed both US and non-US stocks.
Data as of 9/30/2021. Source: Morningstar. Past performance is no guarantee of future results.
It is difficult to predict which markets will achieve the most substantial returns in the future. You may see performance happen over a cycle: first, the US markets will perform best, and then international markets will. When you look back at past figures, you may see visible patterns, but investment decisions are never as clear in the moment.
Diversifying your investment portfolio may cause you to lose out on some hypothetical gains. However, it can also help you avoid potential losses. There is almost always a better or worse investment to make, but you can never be sure until after the fact.
Adding exposure to everything instead of focusing your investments on a single country helps reduce risk. Instead of leaving a considerable segment of the global markets untouched, investment diversification is generally wise.
International markets provide investment diversification
Diversifying your investments means spreading them between different categories instead of only relying on one. Those categories can include:
- Stock positions
- Business sectors or industries
- Asset classes
- Geographic regions or locations
The United States only makes up about 55% of the global stock market. While this percentage translates to hundreds of stock options – more than enough to diversify any portfolio – holding a globally diversified portfolio opens more opportunities for steady growth.
Look at this visual to see what global diversification could look like in action:
Your Oakwell team encourages and actively practices diversifying investments. When you do not restrict yourself to a single country, you can gain positive returns wherever they occur. Reduce your overall risk, broaden your opportunities, and position yourself for growth and success with a globally diversified investment portfolio.
International markets have immense potential
The table below demonstrates the performance potential of international markets:
Source: Avantis Investors. Past performance is no guarantee of future results.
As you can see, there is rarely any consistency regarding which country’s markets perform best each year. Instead, over the 22 years included in this data set:
- In developed markets, there are 12 different best performers. Notice the US is not on the list of best performers, despite outperforming the combined non-US market in recent years.
- In emerging markets, there are 15 different best performers. Only 7 countries appear more than once on this list.
It is necessary to note that investors did not have to predict the best-performing country each year to achieve the returns of the overall region. You just needed to diversify your investments across similar countries. Including international markets in your investment plan can improve your risk-adjusted return.
The most important things for you to know about international markets and your investments
Not all investors know about or understand the appeal of international markets. In fact, we see most investors at least 80-90% invested in US stocks. But keep the following in mind:
- Predicting market performance is never perfect.
- When the US market is flat, the global market typically is not.
- Diversification helps with risk reduction and growth opportunities.
- Diversifying includes global, industry, and asset class diversification, not just having multiple stock positions.
Of course, this information does not mean that having a global market portfolio is suitable for every investor. Depending on your tax strategy, costs, and more, you may want to target a different allocation. However, try to avoid letting home country bias or past investment decisions, whether positive or negative, be the basis for your future strategies.
Your personalized wealth management and investment plans are designed to be diversified, tax-efficient, and cost-effective in the way that works best for you. If you have further questions about international markets and your portfolio, contact your Oakwell experts today.