Decades ago, American investors tended to view the U.S. as the center of the investing world. Yet over the years, the dynamics of geographical allocations in investment portfolios have transformed. While the U.S. stock market remains the largest and most liquid, it’s important to recognize the wealth of opportunities beyond its borders. Notable companies like Samsung, BMW, and Sony operate outside the U.S., presenting investors with diverse investment possibilities. With the globalization of markets, having international stocks in a portfolio has now become the norm.
Given these changes, whether to invest internationally has become an increasingly important question. At Pekin Hardy Strauss Wealth Management, one of the most common portfolio questions we get from clients is: “How much of my portfolio should be in international stocks?”
As a wealth manager, I’ve had the privilege of guiding investors through the advantages and disadvantages of international portfolio diversification. These are the crucial considerations and steps I recommend to my clients when evaluating international stocks, and I believe they’re a good place to start when discussing your portfolio with your advisor.
Risk Mitigation Through International Diversification
One of the primary advantages of international portfolio diversification lies in risk mitigation. International markets often operate independently of the U.S. market, driven by country-specific and business-specific factors. This results in lower correlation, providing investors with a diversification factor that can be crucial during market fluctuations.
Additionally, some countries boast sound financials, characterized by strong economic growth, stable inflation rates, and robust government fiscal policies. These elements contribute to a healthy investment climate, making these regions less susceptible to the kind of economic volatility seen in other markets.
Moreover, favorable demographics, such as a young and growing workforce, increasing urbanization, and a rising middle class, can signal long-term growth potential. These demographic trends often lead to higher consumer spending, greater demand for various services, and overall economic vitality, presenting unique investment opportunities distinct from the challenges faced by the U.S.
That said, international investments aren’t without their risks. Government and geopolitical issues, currency fluctuations, and idiosyncratic country risks can all impact the performance of international stocks. It’s crucial to be aware of these risks and take steps to mitigate them, such as considering currency-hedging strategies and spreading exposure over a wide range of geographies.
Exploring Opportunities Across the Globe
Certain regions and countries have historically offered enticing opportunities for international portfolio diversification, particularly through select securities within these markets. South Korea, often overlooked by investors due to its classification as an emerging market, presents attractive valuations in certain sectors of its developed economy. Notably, specific industries or companies within South Korea may demonstrate financial robustness and growth potential, making them worthwhile considerations for diversification.
Similarly, in Brazil, it is not the entire market that is compelling, but certain securities that become undervalued periodically, offering a strategic investment window. Japan also follows this trend, where particular segments or companies are known for trading cheaply during certain periods, making them attractive for international investments. This focus on specific securities, rather than the entire country’s market, allows investors to capitalize on unique opportunities that align with the strengths and economic cycles of each region.
Still, these countries’ geopolitical landscapes can change in an instant, so it’s important to consider factors like currency volatility and geopolitical risks when evaluating opportunities.
If you’re contemplating international portfolio diversification, here are actionable steps to discuss with your advisor:
- Assess your current exposure.
Review your existing portfolio to understand your existing international exposure. Does it align with your investment goals? Many people don’t even realize how concentrated their stocks are within the U.S., especially if they’re heavily invested in index funds.
- Choose your approach.
Decide whether you prefer broad exposure through ETFs and mutual funds or a more targeted approach with individual stocks. Investing in individual stocks typically requires more detailed oversight and research on your part.
- Determine your allocation.
Realizing the benefits of international stock allocation depends on various factors, including your financial goals, risk tolerance, and understanding of international markets. Distinguishing between developed and emerging markets is crucial, as emerging markets tend to be riskier (though also potentially more rewarding).
- Evaluate valuations.
Valuation metrics play a pivotal role in shaping international stock allocations. Regularly assess the valuations of international markets using metrics like the CAPE Ratio, also known as the Shiller PE Ratio, to identify whether a particular market is overvalued or undervalued relative to historical averages. This can help you recognize potential opportunities.
- Look for hidden risks.
Before making investment decisions, scrutinize apparent opportunities to ensure no hidden risks or big-picture issues could impact your investments negatively.
International portfolio diversification is a nuanced strategy that requires careful consideration of various factors. By understanding the potential advantages, risks, and opportunities associated with investing internationally, you can make informed decisions that align with your financial goals. As always, discuss your international allocation strategy with your advisor.
This article is prepared by Pekin Hardy Strauss, Inc. (“Pekin Hardy,” dba Pekin Hardy Strauss Wealth Management) for informational purposes only and is not intended as an offer or solicitation for business. The information and data in this article does not constitute legal, tax, accounting, investment, or other professional advice. The views expressed are those of the author(s) as of the date of publication of this article and are subject to change at any time due to changes in market or economic conditions. Pekin Hardy cannot assure that the strategies discussed herein will outperform any other investment strategy in the future.