INTERNATIONAL STOCKS... WHY?
For several long-term investors, home-country bias is one of their biggest interferences when it comes to building their portfolio. It refers to investors’ natural tendency to invest in domestic markets. Therefore, most of them overweight stock markets in their home nation, stipulating their country’s equities markets are both safer and will generate greater returns.
But the idea is not true. As a matter of fact, no single stock market has dominated a country or industry when it comes to annual returns. This bias can cost some serious long-term gains to investors, but the latter need not to be average. Various tools are available to go international for dirt cheap.
Many investors feel they have minimal or no exposure to global stocks in their portfolio. Based on Fidelity Investment’s research, home-country bias is rampant; on average, American investors retain around 72% of their investment instruments in US stocks and about ⅓ of them are overexposed to the United States and are not exposed to international stocks.
Being the world’s most powerful economy, it makes sense the United States is prominent in majority of portfolios. Some of its financial markets are mostly liquid. Way back in 1985, American stocks made up about 50% of the total stock market capitalization in the world. But in 2012, the percentage dropped to just 35%, with developed market global stocks hold about 42%. This is partially because of differing overseas alternatives today. Also, emerging markets grew to almost 23% of the world’s total market cap.
You have read over and over again that diversification is one of the most important tools to achieve a successful investing. Setting aside the pros of diversification, focusing only on US stocks may give you some serious long-term gains, too. The same report stated a globally balanced portfolio generated more than the S&P 500 and brought significantly less risk.
Let me give you another reason to go global. Foreign companies are more dividend-friendly. Instead of keeping the money to themselves, these firms pay these out to their shareholders. This must be considered especially those who look after income solutions in zero-interest-rate world. Aside from that, you need to worry about the anticipated long-term decline of the US dollar. Investing in countries with improving economies and escalating currencies may save your portfolio.
And don’t forget emerging markets. Traders may allot specific capital to equities of emerging markets. in the last five years, an emerging market country has been highly ranked in terms of annual market returns.
So why international stocks? Investing in these stocks has never been easy. But adding some spice to your investment portfolio can help boost your income and reduce your risk exposure, mostly from US stocks. Besides, doing so can helps you gain additional benefits, which you cannot obtain from American stocks.
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