The Case for Global Diversification
In the United States, there are approximately 3,600 companies that trade on the public exchanges. That seems like a big number, but it pales in comparison to the additional 10,350 companies that trade in other countries. The investor seeking global diversification has nearly 14,000 publicly traded stocks to choose from. The question then becomes, should we include international holdings in our portfolio? This is best answered, I believe, by reviewing some additional facts.
The total stock market capitalization of U.S. companies was $28.5 trillion at the end of the 3rd quarter 2018. Before trying to wrap your mind around that figure, add another $24.6 trillion of market cap for international stocks1. The U.S. figure, as whopping as it may be, represents little more than half of the global stock market capitalization. By investing in U.S. companies only, we forfeit opportunities that may exist in 45 other countries. We are also ignoring three-fourths of the available companies and nearly half of the world’s market value.
From 1970 through 2017, the S&P 500 (U.S. stock index) performed better than a globally diversified index portfolio on an annual basis 19 times. It performed worse 29 times2. Over the past 48 years, $1.00 in the S&P 500 index would have grown to $122.32 vs. $477.52 in a global index3. In addition to performance, other benefits have included broad diversification and reduced exposure to a downturn in the U.S. economy.
There will, of course, be years where international stocks have a negative impact on your portfolio. In fact, history shows that this can last for several years consecutively. Markets are cyclical in nature and cycles often last 5 years or more. These are the times investors began to have doubt or lose faith in the global strategy. If we take some lessons from the past, abandoning the strategy isn’t a good idea. As the cycle turns, we want to be able to benefit from opportunities that lie ahead. If U.S. markets can outperform international markets over periods of time, you can bet the opposite is true.
-Rick O’Dell
