🌍 How to Reduce Home-Country Bias by Investing in Global Opportunities
As challenging as international investing has been over the past several years, it has also never been more critical. While developed and emerging markets may be more susceptible to economic shocks, geopolitical instability, and factors such as the pandemic, this is also why they may have higher expected returns in the long run. Investing across geographies, especially when valuations are attractive, is a vital way to improve diversification as the global economy recovers from recent energy and inflationary shocks. How can investors maintain perspective around international investments today?
We discuss in this episode of The Wealth Effect Podcast:
📊 Relative Asset Class Returns
⚖️ Weighing Global Equity Valuations
💱 Major Global Currencies
Matt Faubion, CFP®
Founder - Wealth Manager
Show notes and charts:
Global markets have struggled against inflationary and geopolitical shocks
It is also the case that U.S. markets have performed exceptionally well over the past decade. This may signify that focusing only on U.S. investments is enough for some investors, creating a home-country bias within investors' portfolios. However, this has not always been historically true. As the chart above highlights, there have been many periods during which both developed and emerging markets have played essential roles in balanced portfolios. As the global economy recovers, some of these opportunities could reemerge.
International valuations are attractive
Today, valuation ratios for developed and emerging markets are not only far below those of the U.S., but are still well below their historical averages at 12.4 and 11.1 times next-twelve-month earnings, respectively. This suggests that there may be many attractive opportunities for investors willing to look beyond U.S. borders.
The dollar has strengthened against major currencies
When the dollar strengthens, international investments lose value in dollar terms since they are made in foreign currencies, which become weaker.
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