If you are like most people, you have 75% or more of your stock market investment in US equities[1]. The truth is, it’s not just the lay investors that are subject to this “home country bias.” Most financial advisors and money managers are equally prone to this bias. With the US accounting for only around 50% of global output and at historically high prices, a diversified portfolio should consist of a much greater allocation to foreign stocks.
An overwhelming number of very reputable investors and analysts are calling for very low expected future stock market returns in the US. Simply put, with high prices, we can expect below average returns and vice versa[2]. Similar to each of the major stock market corrections we have experienced (2000, 2007), the general population understands the implications but fails to prepare for it. Global diversification can make a substantial difference in the level of risk investors are assuming and mitigate the potential downside in their portfolio overall.
According to research by Meb Faber, allocating a percentage of international stocks to the portfolio can substantially reduce volatility and maximum loss (drawdown)[3]. As we have recently discussed in our newsletter this is extremely important to investors nearing, and in retirement. Knowing that most growth will come from international and emerging markets, it’s important for all investors, young and old, to reconsider their overseas exposure.
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[1] JP Morgan Asset Management
[2] https://www.aqr.com/library/aqr-publications/alternative-thinking-2016-capital-market-assumptions-for-major-asset-classes
[3] http://www.cambriainvestments.com/wp-content/uploads/2016/07/Trinity_DIGITAL_final.pdf pg. 7