It’s a big world — why limit yourself? By thinking globally you can increase the diversification of your portfolio.
Diversification is an investing strategy where you attempt to minimize risk by putting your money in a variety of securities. The general theory is that in so doing, you’re spreading your risk in the event markets suddenly drop. Even during good times when markets tend to rise, diversification can help you benefit from stock increases if specific areas of the economy really power ahead.
Most people take diversification to mean owning a strong sampling of stocks, bonds, mutual funds, and ETFs that gives them exposure to a variety of company sizes and business sectors.
Sure, you can have a diversified portfolio of U.S. companies, but you can also add some world flavor to the mix.
Global diversification essentially means purchasing asset classes and sectors both inside and outside the U.S. One of the easiest ways to do that is by purchasing shares in an ETF or mutual fund that gives you exposure to overseas securities.
For example, you can invest in funds that invest in companies in emerging markets, such as Brazil, China, Mexico, and South Africa. Or you could choose funds that will let you invest in securities in more developed countries, for example in western European countries like France and Germany, or more advanced Asian countries such as Japan.
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By diversifying globally, you can potentially balance the performance of your portfolio. For example, some economists and other financial experts believe the value of U.S. stocks may be too high, after years of steady gains, according to a recent story in Forbes.
At the same time, some analysts forecast that western Europe is poised for growth in the coming years, after many years of recession and sluggish stock market growth.
Similarly, emerging markets have the potential for important stock market gains–by some estimates, as much as three quarters of global growth and consumption could be driven by emerging economies in the coming years. While stocks in emerging markets have taken a trouncing in recent years, there are indications they’re making a comeback in recent months.
If growth in U.S. stocks levels off or decreases, it’s quite possible you’ll find increases in other countries.
Global investing carries its own risks, of course. Emerging market stocks in particular are subject to volatility due to market events, currency swings, or political turmoil. Over the long run, however, global diversification can help you balance out gains in one part of the world with losses elsewhere.
Jeremy Quittner is the financial writer for Stash.