More on Global Investing
There’s a big, global economy out there, so it’s only natural that global investing has garnered a lot of media attention in recent years. Grand Wealth Management has addressed global investing in two previous Financial Insights articles, in the February 2007 and March 2008 issues. Both articles laid out arguments for having both domestic and international components in one’s portfolio. And in fact, global diversification is a core part of our investment approach (see page 8 of our white paper, “The Informed Investor.”)
Still, many U.S. investors remain squeamish about investing outside U.S. borders, with their reluctance fueled by a variety of assumptions about risk. At Grand Wealth Management, we remain confident that global diversification has significant potential to enhance portfolios in terms of two important factors:
- Diversification. Contrary to what many investors seem to assume, U.S. and international equity markets do not move in unison. When individual stocks of companies around the world have similar risk, the stocks do have the same expected rate of return. However, the stocks don't all get to that return in the same manner or at the same time. A study of investment results from January 1970 through December 2007 showed significantly dissimilar price movements between U.S. and international equity markets. So, adding some international exposure to a U.S.-centric portfolio can result in increased diversification – and, consequently, reduced risk.
- Performance. Although international stocks can pose a higher level of market risk than U.S. stocks, a willingness to assume risk yields opportunities to earn higher returns. Investment results in 2007 reminded us that international investments are worthy of serious consideration: in international markets, developed market equities (up 11.6 percent) and emerging market equities (up 39.8 percent) again posted higher returns than U.S. equities.
Our International Equity Approach
Grand Wealth Management utilizes institutional asset class mutual funds from Dimensional Fund Advisors, one of the largest institutional fund managers in the US, to provide diversified, cost-efficient exposure to international equity markets in our client portfolios. Dimensional’s international equity strategies incorporate both developed and emerging markets, as shown below:
Dimensional’s core and asset class international portfolios offer diversified exposure to the risk premiums available in each market or asset class. Through trading desks in Santa Monica, California; Austin, Texas, London and Sydney, Dimensional can trade around the clock. By engaging in ongoing dialog with brokers in the markets where they invest, Dimensional stays on top of local market details and trading characteristics, which helps keep a lid on transaction costs.
The universe for Dimensional’s International Core Equity Portfolio includes all companies in the 22 non-US developed markets defined by Dimensional, with increased exposures to small-cap and value stocks. The portfolio invests in some non-US stocks not included in the MSCI World Index, making it more representative of the total international developed market. The Emerging Markets Core Equity Portfolio mirrors the investable universe of emerging markets companies as defined by Dimensional, with increased exposure to small and value stocks.
Dimensional sets country weight targets in all non-US portfolios based largely on the relative sizes of the universes of eligible companies in each country. In emerging markets, Dimensional imposes a cap on the weight of any single country. This helps minimize the potential negative effects experienced by an asset class characterized by a higher degree of individual country volatility and political risk than developed markets.
Investors Should Go Global – But for the Right Reasons
Although returns in international markets have been strong in recent years, this fact alone is not a good enough reason to invest in these markets. At Grand Wealth Management, we believe people should invest globally for the right reasons: diversification and the potential for long-term growth. We can help our clients decide how much to allocate to international stocks, based on the clients' personal goals, time horizon and risk tolerance.