Before the great financial crisis of 2008, many portfolios had as little as 15-20% of their assets allocated to emerging markets and foreign stocks. Although it may have been a suitable allocation in the boom years of the US economy, domestic business is stagnating, and foreign opportunities are offering better room for growth.
Value or Growth
A common choice in fund products is value or growth. Do you want to be invested in reasonably valued stocks or firms that have the room to grow their bottom line? This risk-to-reward fundamental correlates very well into whole nations as it does individual stocks.
The United States is established and grows slowly, but offers political and economic stability. Other countries, like China, Russia and India offer better growth rates, but more political and economic instability. However, they make up for the added risk with better returns.
In the 1800s, the best investments in the world were in England, as the number of factories exploded along with their soaring economy. Throughout the 1900s, the United States grew tremendously as well, emerging as an economic superpower. Now, ten years into the 2000s, it looks like Asia might steal the century for its rapid development and incredible investment returns.
The best part about being in the right place is that you don’t have to be perfectly invested. Even the worst stocks in the United States did better than the best stocks in countries that were already established, and we can already see that playing true in export-driven countries.
Sizing up Your Portfolio
It’s nearly impossible to suggest a blanket investment approach that works for all investors. If it were truly that easy, then the financial planning industry would cease to exist. However, it is fairly safe to say that investors in the developed world are overweighed their homelands, while under-weighed in the main drivers of growth in the world economy.
An American investor, for example, who has 70% invested in the United States has only 30% vested elsewhere – all while earning an income in US dollars from a company that is US based. Your portfolio should be a way to escape all the risks you take elsewhere in your life and the other assets you simply can’t go without, such as a car, a job and a home. Can you really afford not to be geographically diversified?