One of my clients asked me why global investing was important. Are there any studies that definitively explain the importance of global diversification in a client’s investment portfolio?
YES—GLOBAL DIVERSIFICATION IS A MUST!
After your grandmother told you as a child to always “buy low and sell high,” she also probably reminded you “not to put all of your eggs in one basket”—at least that’s what my grandmother used to tell me! That is the underlying timeless wisdom of global diversification.
Although the stock market has recovered some of its recent losses over the past few weeks, almost all of the economic news here in the U.S. is negative.
Oil is going higher; the U.S continues to lose jobs; food prices are going through the ceiling and, according to the FEDERAL RESERVE, the peak in home foreclosures will not happen until mid-2009.
LONG-TERM DOWNTREND IN STOCK MARKET
Over the next couple of years, I believe we will see some rallies in the stock market, but only within the context of an overall downward trend in the stock market. From 2000 to 2002, we had several stock market rallies followed by even steeper drops in the stock market. We will see that trend again during this current bear market that I believe will last at least until late 2009 or early 2010.
Given the U.S. economic slowdown and the subprime crisis dragging down world stock markets, it would be easy to discount the value of global diversification.
NEW WHARTON SCHOOL STUDY ON GLOBAL DIVERSIFICATION
According to BUSINESS WEEK, a recent study by Wharton School professor Karen K. Lewis found that even though U.S. and foreign stock markets move more in step than they did 30 years ago, investors still need to globally diversify their investment holdings.
Thirty years ago, global exposure cut the volatility of an investor’s portfolio—the ups and downs of performance returns—by 30%.
Although that number has dropped to 15% today, says Lewis, it’s enough to show that global diversification works.
50% IN FOREIGN STOCKS IS THE WHARTON SCHOOL IDEAL ALLOCATION
According to Lewis’ study, the ideal allocation in foreign stocks is 50% of your investment equity assets vs. the 12% average that most investor’s hold today.
Lewis also contends that much of the future growth in investments will be in foreign markets given the strong demand for natural resources and the growth of emerging economies.
At FOXHALL CAPITAL, we typically hold about 60% of our assets in U.S. companies, but many of our holdings are in U.S. companies that supply goods and services globally. Many of these companies receive a majority of their earnings from foreign markets. I feel that FOXHALL CAPITAL is generally within the optimum global diversification guidelines recommended in the new Wharton School study.
Until next week…
change at any time, and are not to be construed as advice for any individual nor as an offer or solicitation of an offer for purchase or sale of any security. Client accounts may differ from model allocations due to many reasons. All investment strategies offer the potential for loss as well as gain. Individuals should consult with their financial professional to determine an investment strategy appropriate for their objectives, risk level, and time horizon prior to investing. Past performance is not a guarantee of similar future performance.