🌍 How to Reduce Home-Country Bias by Investing in Global Opportunities

🌍 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

CONTACT

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.

The bottom line: Despite a challenging period for international investing, it's crucial for long-term investors to avoid home-country bias by maintaining a globally diversified focus across regions, countries, and asset classes. Over the long run, both developed and emerging markets may be volatile, but this goes hand-in-hand with higher expected returns. In fact, many international markets are significantly cheaper on a valuation basis than the U.S., and the dollar is already at its highest level in 20 years.

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This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.