The Case for Investing Globally
The time has come for Americans to invest like world citizens. By that, I mean that most of us are biased in our investment positioning toward the stocks and bonds of the United States, and are thus significantly under-weighted to international investments. The world has become a far more connected place over the past decade, and today's outlook for growth favors the emerging economies of Asia and other developing nations. Failure to adjust portfolios to the new economic realities will prove costly, as investment returns of U.S.-centric portfolios will lag those of more global allocations.
By most any measure, Americans are woefully under-exposed to the international investment markets and have a strong home country bias – one that is more pronounced than with any other population of investors. The average American investor holds between 75%-80% of their stock investments in the U.S., even though the U.S. represents less than 50% of the global stock market capitalization. In addition, Americans hold less than 4% of their bonds outside of the U.S., even though roughly 2/3rd of the world's bonds are abroad. The most common reason for this seems to be fear – the misconception that investing internationally carries higher risk. While this may have been the case in years past, the reality of today is that to not investing globally is risky. Indeed, outside of the foreign stock portion of Americans' investment portfolios, almost all of their assets are US-dollar denominated (principally real estate, bonds and cash).
The arguments for global investing are fairly simple and easy to understand. Capitalism is spreading around the globe, and foreign companies now operate with a strong profit motive and a focus on delivering shareholder value. Many foreign companies are now as well-managed as their American counterparts. Most large corporations already recruit executive talent from around the world; it's become hard to distinguish the management team of a large international corporation from that of Coca-Cola or IBM. Finally, the international economy is growing faster than the U.S., and that growth leads to government stability, currency strength, and increased corporate profits, resulting in stock price appreciation and investment gains. In fact, some of today's best investment opportunities are abroad.
The global economy has experienced many dramatic changes over the last 25 years. According to the International Monetary Fund (IMF), the extent to which countries are linked through cross-border financial dealings has approximately tripled since the mid-1970's. Although there is debate about the impact of globalization, there is no doubt that it has led to lasting changes in the world economy. The business world is increasingly interconnected, thus creating opportunities for companies to compete and succeed on a global scale no matter where they are located.
The "Great Recession" of the past two years has served to accelerate globalization and the reordering of the global economy. The U.S. will remain for now the world's most important economy; however, it will not be the dominant force going forward. Many foreign economies are now healthier than that of the U.S., which faces numerous challenges including:
- unstable real estate markets
- ending current economic stimulus programs
- large budget deficit and rising national debt
- increasing tax burden
- the state of the health care system
- re-regulation of the financial system
I propose that going global is the most important investment theme of 2010. A recent survey of American investors found that 40% plan to increase their exposure to international stocks over the next five years, up from 22% a year ago. This statistic alone should provide a nice tailwind of price support as investors shift further into foreign stocks in the years ahead. Interestingly, the attitudes of Americans still differ markedly from the rest of the world. When asked which stock market will produce the best returns over the next five years, Americans were more likely to pick the U.S. than any other country. Among foreign investors surveyed, the U.S. came in fourth after China, India, and Brazil.
Today, most Americans remain underweighted to the international investment markets. This home country bias worked out well over the past 25 years, during which time the U.S. was the economic growth engine of the world and delivered the strongest investment returns. Over the next 25 years, this same approach will likely lead to poor investment results and missed opportunities. Consider repositioning your portfolio now to look more like that of a world citizen. After all, it's time you accept that you are one.
Source: Maxim Global Wealth Advisors, By Andrew Fisher, CFA, CPA – 2010
Investment Management
