By Scott Hamilton, CFP®
Your investment portfolio may be diversified across asset classes, sectors, and companies, but what about countries and regions of the world? That question may leave you asking, “Why diversify globally?”
This is a great question when you consider that the United States is the largest economy on the planet with a nominal gross domestic product (GDP) of $30.4 trillion. Further, consider that the U.S. is home to more than half the value of global markets.
However, just as relying on a single company or asset class exposes you to a higher risk, counting on the U.S. market alone potentially increases your risk as an investor. You can talk to a financial advisor at Hamilton Financial Planning about risk.
Today’s world is defined by economic uncertainty and geopolitical turmoil. Meanwhile, financial analysts expect growth to continue in emerging markets. Global, or international, diversification matters more now than ever.
So why diversify globally? Here’s why.
Table of Contents
The Reasons for Global Diversification
There are several benefits to diversifying globally (i.e., spreading your investments across different countries and geographic regions): risk reduction, the potential for increased returns, access to new opportunities, and currency diversification.
Here’s a closer look:
Reduction in Reliance on One Market or Economy
By allocating globally, you can reduce the risk of your portfolio being dragged down by a disruption in the U.S. economy. While the U.S. economy might slump, other global economies may be doing well, offsetting any losses.
The Potential for Increased Returns
Companies and industries within emerging and developed economies outside the U.S. might be experiencing high growth rates. Maintaining holdings in those companies or industries can lead to higher returns, especially over time with a diversified portfolio.
Access to Growth Opportunities
Global diversification can provide you access to opportunities that might not be available in the U.S. market. It could allow you to take advantage of high-growth industries, such as technology or renewable energy in Asia or natural resources in Central and South America.
A Safeguard Against Currency Fluctuations
By holding assets in other countries’ currencies, you can mitigate the risk of inflation devaluing the U.S. dollar. If the dollar sinks, your investments abroad can benefit from favorable exchange rates. This provides even more stability to your investment portfolio.
International diversification is a logical strategy to minimize risk and preserve wealth, and it keeps you from trying to guess which country may post the highest returns each year.
Why Diversify Globally? Rising Standards Can Fuel Growth
Since 1950, the global economy has grown faster than the global population. Further, since 2000, when the United Nations adopted goals to improve the lives of the world’s poorest people, extreme poverty has been halved.
While poverty varies from country to country, emerging economies are witnessing the rise of the new global middle class, people who have moved out of poverty and have discretionary income to spend on consumer goods, healthcare, vacations, and cars. Spending by the middle class is expected to grow from $44 trillion in 2020 to $62 trillion by 2030, mostly driven by consumers in emerging economies.
How to Add Global Diversification
“Why diversify globally?” can seem like a big question, and big often means complex or complicated. However, international diversification can be fairly simple. Consider investing in exchange-traded funds or mutual funds to meet three criteria:
- Broad diversification
- Low cost
- Global
You need just a handful of funds. Avoid actively managed funds that tend to underperform with higher fees.
Talk to a Financial Advisor About Global Diversification
Why diversify globally? This approach allows you to add stability to your investment portfolio and raise the potential for consistent returns.
At Hamilton Financial Planning, LLC, we optimize tax strategy and implement comprehensive wealth management for you. Our mission is to guide individuals in Austin and Houston, Texas, toward financial peace with a well-designed and implemented financial plan so you can enjoy a dignified, independent retirement.
Schedule a complimentary get-acquainted meeting online or reach out to us at 512-261-0808 or scott@hamiltonfinancialplanning.com.
About Scott
Scott Hamilton is founder and chief financial officer at Hamilton Financial Planning, a wealth management firm that specializes in providing comprehensive financial planning for retirees. With over 20 years of experience in the financial industry, and having completed over 250 financial plans for retirees across all industries, but mostly the oil and gas industry, Scott is passionate about providing his clients with the tools and insight they need to achieve their financial goals. He has a Bachelor of Business Administration in finance from Texas State University and an MBA in international finance from Pepperdine University. Scott has also been happily married to his wife, Gayle, for over 25 years. To learn more about Scott, connect with him on LinkedIn.
