Global Diversification

by | | Investing

One principle of Evidence-Based Investing is Global Diversification.

Diversification means you don’t have all your eggs in one basket. This means owning thousands of stocks (likely in the form of mutual funds or ETFs), as opposed to owning a handful of individual stocks. Global Diversification simply means owning stocks from companies around the globe, not just companies from the United States.

In hindsight, US stocks have outperformed international stocks over the last decade. That has lead some investors to believe this will continue indefinitely, and that they should only invest in US companies. We believe this is a mistake. While US stocks outperformed international stocks over the last decade, you only need to go one decade earlier to find a period where international stocks outperformed US stocks.

In fact, in three of the last five decades, international stocks have outperformed US stocks.

The bottom line is that in any given period, US stocks can outperform international stocks and vise versa. And because we can’t predict when US or international will outperform, the appropriate strategy is to be globally diversified and own both US and international stocks in your portfolio.

How much international stocks should I own?

If you’re on board with global diversification, you might be wondering what percentage of your portfolio should be international stocks. A good place to start is by looking at how much of the total stock market is made up of international stocks. As seen in the chart below, the total stocks market is split roughly 60/30/10 between US, international, and emerging market stocks. This can act as a good starting point for how to allocate your own portfolio.

If you want to find out if you have a globally diversified portfolio, consider scheduling a free Financial Pulse Assessment™. It includes an investment analysis that reviews if you have proper global diversification.

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