Importance of market diversification (beyond the US)

How investing beyond the United States can help to make your portfolio more balanced and robust

How investing beyond the United States can help to make your portfolio more balanced and robust

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The US stock market has been the dominant player in the global market for years. However, with the rise of China and other economies, the future may not be that certain.

Today, US stocks represent approximately 60% of the total value of global markets. It is followed by Japan (6%), UK (4%), China (4%), and France (3%) which make up the top five stock markets in the world.

International stocks represent an added opportunity for investors. By investing in stocks from other countries, you can reduce risk, open yourself up to new opportunities, and create a more balanced portfolio.

Let’s take a look at why is market diversification so important.

Why Is Diversification Important

1. Mitigate risks of a single market

Diversifying your portfolio by investing in different markets can be a smart way to protect yourself from the potential risks of any single one. For example, if you invest only in US stocks, then any downturns in the US market will have an immediate impact on your returns. But if you invest across different markets — say Europe and Asia — the effects of the US market will be reduced because those other economies might be doing well and offset any losses incurred in the US market.

Young investors will probably be shocked to hear that individuals who invested in the S&P 500 for over a decade had generated flat or negative returns. Yes, this happened from 1999 to 2009, when the annualised total return of the S&P 500 was -0.9%. This period is known as the Lost Decade, where the stock market produces flat or even negative returns over ten years.

This serves as a sobering example of why it is important to preserve capital through diversifying holdings and staying invested over long periods of time.

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2. Take advantage of new opportunities and growth potential

Another great thing about investing in foreign markets is that it opens up access to new opportunities and growth potential. This is because some companies outside of the US may be better positioned for growth due to their location or industry sector.

For example, many European countries like Germany and the Netherlands are currently leading the way in green energy initiatives which could create new opportunities for investors who want to get involved early on before larger corporations jump into the fray.

If investors focus only on the US, they may miss out on great companies that are based in other countries. By expanding their investment horizons, they can take advantage of opportunities as they arise in different parts of the world.

3. Different markets can react differently to global events

It is also important to remember that markets and countries can react differently to global events or economic changes.

For example, there was a 7.1% decline on the first day of NYSE trading after the September 11 attacks, setting a record at the time for one of the biggest losses in the exchange’s history for one trading day. This is probably not the best time to go all in on the S&P 500, which tracks 500 of the largest companies in the USA.

While the US reacted to the attacks by focusing on the war on terror, China took this chance to grow its economic and military power exponentially, causing its Gross Domestic Product to jump from US$1.2 trillion in 2000 to more than US$17.7 trillion in 2021.

By diversifying your portfolio across different markets, you can weather storms like this and come out ahead in the long run.

Drawbacks Of Market Diversification

However, we do acknowledge that there are certain drawbacks to diversifying beyond the United States.

US market still affects the world: First and foremost, the US stock market still plays a major role in affecting economies around the world despite the broad range of investment opportunities in global markets. As the country is one of the biggest economic players, any news or actions that cause shifts within their stock market can have an international ripple effect on other markets and investors alike.

Less returns overall: Another potential drawback to stock diversification beyond the US is that it may lead to lower overall returns. When you spread out your investments across multiple markets, you are also spreading out any potential gains or losses. So while you may not experience major losses due to market fluctuations, you also won’t see as large of gains either.

Reduce Your Risk By Not Putting All Of Your Eggs Into One Basket For many years, the US stock market has been the primary destination for investors looking to grow their wealth. However, for anyone looking to build a solid financial future, diversification across different markets, companies, sectors and industries, as well as asset classes is key to achieving long-term success.

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