This video shows investors that the U.S. is rarely a top performing stock market and the benefits of diversifying in International Developed and Emerging Markets.
How Investing Globally can Grow Your Retirement Portfolio
So, what are your options when it comes to global investing? Meaning investing in the U.S., as well as countries outside the US. In this video we will discuss the world of opportunities available to investors.
But first, let’s take a closer look at the world to see why you should invest globally. With the United States being the dominant presence in the global economy you may believe that investing in companies within the US is all you need. But this is not the case.
The global economy is broken down into three areas:
The “US”, “International Developed” countries, and “Emerging Markets”.
We know the US is one country, but what about International Developed markets? Altogether, there are about 23 countries with free and open capital markets that make up this category. These countries, like to the US, have what we call “developed economies” that are mature. Examples of the largest include: the United Kingdom, Japan, Canada, Australia, Germany, France, and Switzerland to name a few.
Then we have what’s called the Emerging Markets. This represents countries that are still experiencing high growth in their economy because they are not fully developed. Here, not everyone has a TV, a cell phone or an automobile. In fact, 85% of the world’s population lives in Emerging Markets and they all want what we have. Altogether, there are about 21 countries in this category. Examples of the largest countries include: China, Brazil, South Korea, Taiwan, India, Russia, and South Africa to name a few. So, between all these regions there are roughly 45 countries, which give investors the opportunity to further diversify their portfolio.
So, why bother investing outside the US? The answer – because if you only invest within the US you would be missing out on HALF of the world’s investing opportunities. To put this in perspective, let’s take a look at the market capitalization of the world today. Meaning, if we adding up the total value of all the publicly-traded companies in all the countries around the globe, what would they be worth? The answer: $39 trillion. And how much of this value is domiciled here in the US? About 49%, representing $19 trillion. So essentially, this is the total value of all the companies in the US. What about International Developed markets? They total up to roughly 40% of the world’s market value, representing $16 trillion. And finally, we have the Emerging Markets, which represent only 11% of the world’s market capitalization, or about $4 trillion. This is the anatomy of the world’s capital markets.
So why should you care?
Because while the US represents half of the world’s investing opportunities; it rarely outperforms the other world markets. As a matter of fact, the US is seldom the top performer when comparing country performance around the globe.
To see this, let’s first take a look at International Developed countries…
This chart (see video) ranks each country’s annual performance from highest to lowest in each column year-by-year, with the best performer on top, and the lowest performer at the bottom. Each country has been given a different color to emphasize an important point. The patchwork dispersion of colors shows there is little predictability in any single country’s performance from one year to the next.
You never know which country will outperform from year to year and attempting to predict which one will be next year’s winner is a guessing game. For example, there are cases where the lowest performing country in one year became the highest performing country the following year, such as Japan in 2007 and 2008; then subsequently Japan dropped to become the lowest performer again in 2009. You’ll also notice that over this ten year period the US was the top performer only once, in 2011.
How about the Emerging Markets?
Let’s take a look at a similar chart, but this time it’s populated with countries in the Emerging Markets. While the US is NOT an emerging market economy, it is represented here in the black square to show an important point. When comparing the performance of these countries to that of the US you’ll notice that the US is rarely a top performer. Also, while emerging stock markets around the world often outperform the US market, their individual country performance is highly unpredictable.
So what’s the point of all of this? These charts reveal two important points:
First, investors who prefer to keep their capital close to home (by only investing in the US) will pay a high price in terms of lower diversification and missed opportunity.
Second, the investment world is constantly changing as money flows to the markets that offer the most attractive returns. So, investors who have a global asset allocation strategy are more likely to capture the best country returns wherever they happen to occur.
So, what’s the best way to gain access to all these countries in a cost-effective way?
The answer: use a low-cost index fund, such as an ETF, that tracks all the International Developed countries in one single fund. And the same is true for the Emerging Markets; using one low-cost fund can give you complete global diversification across all emerging market countries.
So remember, when it comes to investing, think globally, and you’ll have a world of opportunities to grow your portfolio!
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