All Posts Tagged: global diversification

How well do you know global diversification?

Wade Balliet
Posted by Wade Balliet
Investment Strategy

While diversification is a foundational strategy for some investment portfolios, many people may not be familiar with how global diversification supports sound portfolio management.

Scattered assortment of global paper currency, including U.S. and European notes.To test your knowledge, try this quick quiz. Which of the following statements are true, and which are false?

1. A globally diversified portfolio potentially may produce significant benefits in lower risk and higher returns.

2. A globally diversified portfolio outperformed the S&P 500 Index since 2001.

3. Investors 55 years old and up often have less international diversified holdings than younger investors.

4. Global diversification might consider allocations in Developed, Emerging, and Frontier economies.

5. Approximately 50% of the global equity market resides outside the United States.

6. A diversified portfolio of U.S. stocks, foreign stocks, and U.S. bonds may be created with three index funds or exchange-traded funds.

All the statements are true. Surprised?

International markets in the allocation mix

For investors looking for a diversified portfolio with the investment objective to minimize risk and maximize returns, it’s important to consider looking outside U.S. markets and create an allocation strategy that includes a wide range of international markets.

Recently in the economy, where the U.S. market has significantly outperformed global markets in the past few years, the growth of a global portfolio is nearly equivalent to a U.S.-only portfolio from 2002 to 2014. And over a longer time frame, a portfolio with global holdings delivered a higher return for the same level of risk, according to Bloomberg. (I cited a similar study in a previous blog post.)

A global strategy for a global economy

Most investors in the United States are under-diversified and underweighted in international assets — meaning they have all or a majority of their holdings in one geographic market. For investors with little or no allocation to international, this may represent a significant risk.

Interestingly, investors over the age of 55 are likely to have less international exposure within their portfolio — perhaps due to adopting a more conservative investment strategy closer to retirement age or because they are more experienced, and more comfortable, investing in U.S.-based companies.

Even portfolios that include a number of multinational companies may not meet diversification goals because the multinationals may be primarily in developed countries — and therefore don’t provide coverage in emerging and in frontier markets.

Therefore, the Bank of the West Investment Advisory & Management group suggests that investors review their portfolio for global diversification and consider an allocation strategy that utilizes international equities that can potentially minimize risk and capture higher returns.

An easy step toward diversification

Understanding global markets and selecting investments across international markets can be a challenge, but developing and maintaining a global diversification strategy is not as difficult as it may seem.

For investors who are interested in creating a globally diverse portfolio, as well as those who are expanding their share of international holdings, small adjustments in allocation may produce significant benefits in terms of lower risk and higher returns.

Achieving global diversification may be fairly simple — a single Exchange Traded Fund (ETF) can track to a diversified international index and provide broad international exposure.

Investors can also select from investments in more than 50 countries, focusing on these groups: developed, emerging, and frontier markets.

  • Developed markets are those with well-established economies and financial systems, such as United States, France, Germany, Canada, and Japan.
  • Emerging markets include countries that are in the process of establishing a more mature marketplace, such as China, Brazil, India and Eastern European countries. These generally offer greater risk for potential losses, along with the potential for greater rewards.
  • Frontier markets are less developed than emerging market countries — and include approximately 34 nations, including Croatia, Tunisia, Vietnam, and Jamaica. Many frontier nations do not have their own stock exchange. These tend to have the greatest risk with potential for dynamic economic growth.
Focusing on the big picture

Recognizing the risks and advantages of a diversified portfolio and understanding the ways to achieve diversification may benefit your investment strategy. Regardless of economic performance within markets or across markets, global diversification may make it easier to reach targeted goals for your portfolio by capturing gains and mitigating losses across a wider range of market conditions.

NOTE: Ben Baier contributed to this article.

The views presented are of the Investment Management and Trust Division of the Bank of the West Wealth Management Group and should not be construed as investment advice. Past performance is no guarantee of future results.

All investments involve risk. Investors should seek the advice of a financial professional regarding the appropriateness of any securities or strategies discussed. As with any investment strategy there is a possibility of profitability as well as loss. Foreign securities, especially emerging markets, will involve additional risks including exchange rate fluctuations, social and political instability, less liquidity, greater volatility and less regulation. Frontier markets have lower market capitalization and liquidity than more developed emerging markets. ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses.

Diversification spreads your investment dollars into various asset classes to add balance to your portfolio. Using this methodology, however, does not guarantee a profit or protection from loss in a declining market.

Bank of the West Wealth Management provides financial products and services through Bank of the West and its various affiliates and subsidiaries. Bank of the West and its various affiliates and subsidiaries are not tax or legal advisors. Please consult your tax or legal advisor for more information regarding your personal situation.

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Investment recommendation: Neutrality to U.S., slight overweight to international

Wade Balliet
Posted by Wade Balliet
Investment Strategy
closeup on a pen (in human hand) tracing a pie graph on an investment statement.

Do you have the appropriate equity allocation in your portfolio in the current environment?

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Achieving your global diversification goals

Wade Balliet
Posted by Wade Balliet
Investment Strategy
View looking upward at dozens of flags waving from flagpoles against a blue sky.

Achieving global diversification goals has the potential to be relatively simple, low-cost, and targeted.

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