It certainly seems that the world has become smaller and that anything is within reach. Technology and developments around the world have led to a more globally integrated world economy. As investors, globalization should not be overlooked. Many different investment opportunities exist around the world, and investors have the opportunity to take advantage of these through their investment portfolios.
U.S. investors often demonstrate a home bias when it comes to investing and tend to hold a large percentage of their portfolio in U.S. companies. While a U.S.-centric focus has paid off for many investors over the past few years, we think that it is a good time to remind people of the potential benefits of investing in international companies.
According to Forbes, of the top 100 publicly traded companies in the world, only 37 of them are headquartered in the United States. A simple review of global market capitalization, as seen in this chart, shows that half of the global stock market value exists outside of the United States. Avoiding or limiting your exposure to foreign stocks will reduce your long-term investment potential because you are essentially eliminating half of the global marketplace by not including international companies in your portfolio.
Because nations operate under different economic and political constraints, each nation's return potential and return patterns are likely to be different. International investors can benefit from these dissimilar market cycles and evolving business industry structures created by the different product demands of consumers located in various parts of the world.
Although the United States has historically been a breeding ground of innovation and new ideas, investors would also be remiss to assume that all of the new developments in the future will only come from U.S. companies. By having representation of more of the world's marketplace in your portfolio, you improve the chances that you will be invested in the world's next Google, Facebook, or Apple.
Lastly, currency is an important diversification item to consider. Over the short-term, currency movements can hurt or help an investor. Last year, the U.S. dollar appreciated against most major currencies, which created a large headwind against international stock performance. In other economic environments, when the dollar loses value against other currencies, the performance of international stocks is supported by the impact of the declining dollar. Currency movements can be quick and are extremely difficult to time. When evaluated over a long-term period, currency movements will not likely add significantly to a portfolio's returns. However, the impact of the currency movements can help reduce the overall volatility of the portfolio.
While we have experienced a few years in a row where the U.S. stock market is the highest performing market, it would be a mistake to project this same relationship into the future. Historically, international investments have periods of similar dominance relative to U.S. stocks. The world will continue to evolve and grow. Your investment portfolio should grow with the global marketplace. We've included a link on the right to a piece by Fidelity Investments that further elaborates on the advantages of a globally diversified portfolio.
Please feel free to contact your investment advisor to further discuss our views on international investing or to answer any of your questions.