Diversifying investments across multiple countries and regions is an essential strategy for reducing portfolio volatility, mitigating the risk of economic downturns and geopolitical challenges, and capturing growth opportunities available in other markets. These tips can help you improve your portfolio’s global diversification.
1. Consider your risk tolerance and investment goals.
Before you make a move to improve your global investment allocation, it’s important to consider your level of comfort with risk and what goals you’re hoping to achieve. Are you investing for retirement? Do you hope to save for a large purchase, such as a home or a child’s college education? Your goals will impact your investment timeline as well as the level of risk you can take on.
2. Determine what types of investment vehicles and asset classes best meet your needs.
Consider what types of international investment vehicles and asset classes best meet your needs. Options include:
• Mutual funds and exchange-traded funds (ETFs) — These are pooled investment vehicles that can provide diversification within a single investment and allow you to access global diversification across regions, industries, and market capitalizations. They can be actively managed or track an index.
• Index funds — Index funds are a type of mutual fund or ETF that replicates the performance of a designated market index, such as the MSCI EAFE Index or the FTSE All-World Index. They offer the same diversification benefits but because they track a market index and aren’t actively managed, they typically have lower expense ratios and offer a higher chance of achieving market returns over the long term than an actively managed fund.
• Individual stocks and bonds — Investing in individual stocks and bonds across various geographic regions and sectors is another way to achieve global diversification. But international investments aren’t always as accessible to average investors, as some don’t trade on domestic exchanges. It also comes with more risks, because the performance of a single investment can have a much larger impact on performance than in a diversified pool. Investors generally need a larger portfolio to achieve the same amount of diversification using individual stocks as they can in a smaller portfolio using mutual funds and ETFs.
3. Research and monitor.
Thoroughly research various markets, different industries, and the specific investments you may be interested in. Keep in mind, global market events and currency fluctuations may impact your international investments differently than your domestic ones. Diversifying across currencies and geographic regions can help spread out your risk.
4. Regularly rebalance.
Rebalance your portfolio as assets that have performed well begin to dominate your allocation. Doing so can help ensure you remain true to your objectives and risk tolerance. It also helps you to sell high and buy low, which can be difficult to carry out in practice without a strategy.
Failing to rebalance on a regular basis can result in certain investment types, regions, or sectors becoming overweighted, which can lead to unintended concentration risk. On the other hand, regularly rebalancing to your target asset allocation can help lock in gains from top-performing investments while buying underperforming assets when they’re undervalued.
A big challenge many investors face when establishing a globally diversified investment portfolio is finding the time to research and manage all the moving pieces. International investing comes with additional risks, market exposure, and complexities, which is why it’s helpful to work with a qualified wealth manager to expand your portfolio overseas.
AJ Kratz, CFA, CFP, is a private wealth manager and partner with Creative Planning. Creative Planning is one of the nation’s largest registered investment advisory firms, providing comprehensive wealth management services to help align all elements of a client’s financial life, including investments, taxes, estate planning, and risk management. For more information, or to request a free, no-obligation consultation, visit creativeplanning.com.
This commentary is provided for general information purposes only, should not be construed as investment, tax, or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.