Many investors prefer a globally diverse strategy, but some find that a portfolio focused on U.S. stocks and assets is better for their situation. Consider your time horizon and risk tolerance as well as your long-term goals to determine which might be right for you.
Looking to create diversity in your portfolio? One question is whether to include global stocks or invest strictly in U.S. assets.
Often, economic theorists talk about a globally diversified portfolio. But each investor has a unique situation, and everyone needs to weigh their personal financial goals, risk tolerance, and time horizon against the pros and cons of investing with a U.S. bias. For some, maintaining an all-American portfolio may be the way to go, but others may find a more global strategy appealing. As with most investment decisions, there are trade-offs in keeping a purely U.S.-focused portfolio, but it can also offer advantages.
Investing in Stocks Closer to Home
Pros: More stability, more familiarity with companies
Cons: Less diversity, potential to miss out on gains of global markets
With an all-U.S. portfolio, investors can invest in asset classes such as stocks and bonds that are domiciled in U.S.-based companies like Johnson & Johnson (JNJ) and Apple (AAPL). Such companies often have global exposure through their earnings and geographic sources of revenue.
For U.S. residents, investing in domestic stocks can offer a sense of familiarity, which in turn can lead to a sense of security. For example, they may know exactly where to look to learn about a company’s financial performance.
Investors tend to be more confident in companies they know. Essentially, investors, especially those who have a tendency to react quickly, may be more willing to stick to their long-term financial plan when they feel they are more knowledgeable about their investments.
In contrast, global assets can expose investors to more risk. Many U.S. investors may be unfamiliar with nondomestic companies like Tencent or Alibaba (BABA). They may not know their products, their brands, or much about their business operations. So when the market hits a downturn, these unfamiliar investments may be a source of investor concern.
When you invest abroad, you invest in the health of another country as well as the value of its currency. When you invest in the U.S., you invest in a mature economy that has built strong economic foundations over decades. Many other countries are developing, and their economies may be more unpredictable. Thus, investing in an index that follows the S&P 500 (SPX) or the Dow Jones Industrial Average ($DJI) may be perceived as less risky than an emerging markets index.
Investing in Global Stocks
Pros: More diversification, potential for larger gains
Cons: More volatility, less familiar companies
Although having a portfolio that includes a number of U.S. stocks can have several advantages, there are also potential downsides to consider.
Primarily, investors who avoid investing in foreign equities, currencies, or bonds may lose out on gains that can be much more significant than many U.S. assets.
When you invest globally, you invest with more diversity, including more growth stories. The United States has one of the highest levels of output in the world, but its annual growth rate is in the low single digits. Countries like China and India arguably have more recent attractive and compelling growth stories. A portfolio with a U.S. bias may experience less volatility but could potentially lose exposure to global growth stories and might be invested in a narrower set of opportunities.
Investors with a shorter time horizon may find investing closer to home may work well. If you have a longer term for investing, a global portfolio could help you access more potential growth.
Investing a portion of your portfolio in foreign companies can provide added diversification, which can be beneficial. But deciding which is the better strategy is ultimately up to the individual investor. A financial advisor can help you analyze your personal situation and financial goals.
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