Go Global for Diversification that Travels Well

US-based investors may believe they know the United States best. Accordingly, they are liable to put the bulk of their investments in stocks and bonds of US-based companies and in US federal and municipal fixed income securities. Given the size and relative safety of this market, that may seem a sound approach. Yet this strategy has some holes. “Home bias” can limit your investment opportunities and constrain your ability to benefit from diversification.¹

Consider these revealing numbers:

• The US stock market is the biggest in the world, but stocks of the roughly 18,200 companies trading outside the US represent 35% of the world's $94 trillion equity market (see Exhibit 1).²

When Americans invest outside the US, they can capture equity returns from thousands of companies around the globe and potentially offset weak performance in one market with stronger returns elsewhere. Returns in 2022 offer a useful example of this phenomenon: The US stock market tumbled 19.8%, but non-US developed markets like the UK (–4.8%) and Hong Kong (–4.7%) performed much better. ³ And, in two examples from emerging markets, Turkey soared 90.4% and Chile gained 19.4%. Similarly, in fixed income markets, both yields and total returns typically vary across the globe and often do not move in lockstep, which is no surprise. Bonds issued in different countries and currencies can offer a range of yields and expected returns.

A country’s size, population, or gross domestic product doesn’t necessarily tell us much about the investment opportunities in that country. Japan, for instance, is relatively small in landmass but accounts for 5% of the world’s equity market value—representing over 2,400 companies, including familiar names like Toyota and Sony—as well as 10% of the investment-grade bond market. Even a tiny country like Switzerland is home to publicly traded giants like Nestlé and two of the world’s biggest pharmaceutical firms.

By looking outside their home market, investors can expand their choices and opportunities for higher expected returns. A global approach can also enhance diversification, which may help reduce portfolio risk and volatility. This isn’t guaranteed to produce strong returns every year, but it can deliver more reliable outcomes over time, helping investors stay on track toward achieving their long-term goals.