Want A Successful Investment Portfolio? Think Globally.

Jorge A. BetancourtUncategorized

The world of investments is so massive that much of it goes unnoticed by the average investor. When crafting your portfolio, don’t hesitate to think outside the box and outside your borders. There are lots of exciting developments and opportunities across the world. The rapidly growing Exchange-Traded Fund (ETF) industry has helped give average investors access to profitable investments throughout the world. For example, the average investor could choose to invest in the Vanguard FTSE Europe ETF and get exposure to Europe’s most established companies. The scope of investments goes well beyond Europe. You can invest in almost any region in the world. You can even find ETFs that give you exposure to companies within single countries, or entire industries within specific world regions. The possibilities are truly massive.

Diversification

One of the hallmarks of successful portfolio management is diversification. To best achieve your investment goals, you need a healthy mix of stocks, commodities, bonds, cash and any other asset class that will help you minimize portfolio risk. With a broad mix of assets, the poor performance of one asset class does not necessarily mean that your entire portfolio will perform poorly. Often the rise in value of one asset class can more than make up for the loss in value of another. As the old saying goes, “don’t put all your eggs in one basket.” Investing in foreign assets is a great way to diversify your portfolio and protect you from uncertainty.

Instead of only buying stocks of companies that are based in the US, invest in ETFs that give you exposure to successful companies outside of the US as well. Instead of keeping the cash portion of your portfolio in US Dollars only, invest in Currency ETFs that give you exposure to many more of the world’s currencies. Investors can find exposure to foreign bonds, foreign commodity companies and foreign real estate funds as well. When managing portfolio risk, it is not only important to diversify between asset classes (e.g. stocks, bonds, cash, etc.), but also to diversify by world region when choosing among those asset classes.

Growth

Holding foreign assets can also increase the probability of you making large investment returns. Developed world regions, such as the US, Eurozone and Japan, tend to have lower rates of economic growth. In these regions, debt levels are high, manufacturing is scarce and populations are aging. However, that is not the case in many other world regions. Many countries in Latin America and Asia have young populations and they are rapidly industrializing. This could make their local companies very profitable in the long-run. Although China’s debt levels are currently high, China and India have an economic growth rate close to 10% per year, while the US has a growth rate near 3% per year.

Choosing investments outside of the US can make you money over the entire lifetime of your portfolio. However, high growth investments can also be much more volatile. Stay truly diverse by investing in stable, developed countries (e.g. Eurozone and US) as well. Investing in many world regions will limit your risk through diversity while giving you exposure to high flying growth.

Opportunity

Market cycles can take years to develop. If you are only investing in one world region, you are entirely at the will of its market cycle. This means that you will take part in the boom phase as well as the bust phase of the cycle. Investing globally gives you the opportunity to take part only in specific phases of a cycle. In other words, you could invest less in a market that is overvalued and more in a market that is undervalued. An overvalued market is more prone to significant losses while an undervalued market is more prone to significant gains. Let’s look at an example using the CAPE ratio. CAPE stands for Cyclically Adjusted Price-to-Earnings ratio, and was developed by Nobel winning economist Robert Shiller. It is used to gauge how overvalued or undervalued a certain market is. Here is CAPE broken down by country:

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The US is currently at a 26 CAPE. Usually anything over 20 is getting into overvalued territory. This means the US is more prone to significant market losses than the countries on the left side of the graph. In this example, if you were looking to be more exposed to a boom phase rather than a bust phase, you would sell some of your US assets and buy assets from countries such as Russia, Brazil and Portugal. Global investments will help you take advantage of many of the opportunities that world markets provide.

Global investments are extremely beneficial for building a sound investment portfolio. They minimize risk by adding diversity to your portfolio, they give you access to regions that have high economic growth, and they let you take advantage of all the interesting opportunities around the world. ETFs are the perfect instrument for gaining exposure to these global assets. Make your portfolio more successful by investing globally.