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The Benefits of Global Diversification

For investors in the U.S. stock market, 2006 was a very good year. The U.S. stock market, as represented by the S&P 500 index, gained 15.8 percent in 2006 – well above the S&P 500’s long-term historical average of 10.4 percent.
As good as 2006 was for investors in the U.S. stock market, it was an even better year for those invested globally. Stock prices rose in 46 of the 50 foreign countries whose equity market returns are reported by MSCI (Morgan Stanley Capital International). There were 36 markets with a total return greater than 20 percent, while 19 (mostly emerging) markets had a total return greater than 40 percent!
This significant disparity in results for U.S. versus foreign equity markets illustrates the importance of investing your portfolio both domestically and internationally. Yet many American equity investors seem indifferent or averse to the idea of venturing beyond the U.S. stock market. That’s understandable to an extent, especially because of a major economic factor that might, on the surface, seem to preclude any need to invest internationally if you’re already invested in the U.S. stock market. The factor we’re referring to is globalization.
You’ve probably heard about globalization. Basically, the world is getting “smaller” from an economic standpoint, due mostly to technology. Globalization has created a new paradigm in which markets and businesses around the world are linking together to become larger, global entities.   
In what might come as a surprise to many, globalization has not caused results in U.S. and international equity markets to move in lockstep. When individual stocks of companies around the world have similar risk, these stocks do have the same expected rate of return. But the stocks don’t all get to that return in the same manner or at the same time. A major study of investment results from January 1969 through December 2004 showed tremendously dissimilar price movements between U.S. and international equity markets.
So it does make sense for your portfolio to have domestic and international components. At Grand Wealth Management, we can guide you through making investment decisions that reflect your personal goals together with the reality of our times.

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