4 reasons to embrace global investing
June 24, 2022
June 24, 2022
With rising interest rates and inflation dominating the headlines, are your clients considering a shift in their portfolio allocation strategy? You likely also have clients who are locked into a home bias, not realizing how much this lack of diversification can cost them over the long term. Is international investing worth a look? There are some excellent reasons to consider an allocation to investments outside of the U.S.
Financial markets around the world change rapidly in response to news and events, and by avoiding international stocks your clients are excluding a large portion of the global opportunity set. In fact, international stocks, represent almost 44% of the global market—a figure too large to ignore.1
Recent extreme market volatility can afford you the chance to help clients redeploy their capital in order to help them achieve their long-term financial goals. Here are four reasons to embrace global investing.
The rationale for diversification is clear—U.S. and international stocks often swap positions as performance leaders. What might the future hold as leaders potentially turn to laggards? Global diversification gives you a chance to participate in whatever region is outperforming at a given time.
Here you will see how stock market leadership has alternated in the past between the U.S. and international markets. Rather than choosing one region over another based on past performance, consider focusing on the long-term benefits of a global approach.
U.S stocks have had a great run, but will that continue? While we believe the price/earnings ratios for stocks are some of the best indicators of future returns, we also recognize that you must take into account valuations from a fair-value standpoint, factoring in global economic and market changes.
Based on these valuations, the expected return outlook for non-U.S. stocks over the next 10 years is higher than that for U.S. stocks.
(in U.S. dollars)
Having a mix of international and U.S. stocks has historically tamped down the volatility in portfolios. Of course it's natural to be concerned about geopolitical risk, but having a mix of U.S. and international equities can actually reduce portfolio risk.
The maximum volatility reduction benefit of adding an allocation to international equities occurs between the 20%–50% range.
Another reason to look beyond U.S. borders is the higher-yield-generating opportunities available outside the U.S. While domestic dividend-oriented strategies have fared well, international stocks can also offer favorable dividend values.
An international portfolio over the past 10 years experienced a higher dividend yield than that of a U.S.- only portfolio.
Consider adjusting your international equity allocation with our lineup of low-cost ETFs.
|Vanguard ETF®||Ticker symbol||Expense ratio|
|Total World Stock||VT||0.07%|
|FTSE All-World ex-US||VEU||0.07%|
|Total International Stock||VXUS||0.07%|
|ESG International Stock||VSGX||0.12%|
|International Dividend Appreciation||VIGI||0.15%|
|International High Dividend Yield||VYMI||0.22%|
|FTSE Developed Markets||VEA||0.05%|
|FTSE Emerging Markets||VWO||0.08%|
|FTSE All-World ex-US Small-Cap||VSS||0.07%|
1 Sources: Vanguard, FactSet, and MSCI as of March 31, 2022.
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