“Travel is fatal to prejudice, bigotry, and narrow-mindedness,” wrote Mark Twain in Innocents Abroad, “and many of our people need it sorely on these accounts.”
You’ve probably met people who have rigidly held views on various nationalities or regions outside our country. They’ve never visited these places, but they can tell you for a fact everything that’s wrong with them. It’s almost impossible to convince them that they might actually like the people and food in those places, if they took a trip to experience them firsthand.
The point of travel isn’t to constantly judge foreign locales against the amenities of home, but to simply appreciate their uniqueness.
A similar kind of bias keeps many investors from sending a portion of their investment portfolios to foreign markets. In recent years, U.S. stocks as a whole have produced better returns than international markets. Aptly named “Recency Bias” by behavioral scientists, this mindset causes many investors to conclude they’re better off keeping all their investment capital here.
Just as international travel is an opportunity to experience things that are different from home, investing in international stocks can offer some strategic benefits beyond what’s available in our domestic market.
The more diverse your portfolio the better. Wharton Business School professor Karen Lewis found that a well-diversified global stock portfolio can potentially cut your risk by a few percentage points a year, or improve returns by around half a percentage a year when compared to holding just U.S. stocks for the same period.
While the U.S. market is booming now, it’s good to remember the periods in the past when international stocks have done much better by comparison. Currently, some foreign stock valuations are at a 20 year low when compared to the U.S. This makes them a relative bargain and a potential counterbalance if the US market movement shifts back toward its valuation averages.
The goal of nearly every investor is to protect their capital while earning inflation-beating returns. In research published in The Journal of Portfolio Management, Maximilian Rödel found that international equities tend to hedge against inflation changes more effectively than do domestic equities.
The potential benefits of international allocation are available to the prudent investor who understands the importance of broad, global diversification. While it’s impossible to predict how markets will move, it is possible to better prepare for whatever might happen by staying committed to greater diversification in your investment strategy.
We can help ensure that your portfolio is taking full advantage of the potential benefits of international exposure.