The Importance of Diversification for Individual Investors
Most investors understand the benefits of diversification. Few individuals think it wise to hold just a few stocks or invest heavily in just one sector. Diversifying is central to risk management and is vital to long-term investment success.
Yet most American investors aren't nearly as well diversified as they think. American investors tend to focus on US stocks only. But US-only investors can miss huge opportunities to manage risk and enhance performance. The US is only about 50% of the world's developed equity market!
US-Only Investors Miss Half the Picture
Imagine investing in only half of the S&P 500 sectors. Consumer Staples, but not Health Care. Tech, but not Energy. What if you picked the worst sectors and missed the best? In the same way, a US-only portfolio can also be risky—it can lack the opportunities for both performance enhancement and risk management that you could get in a global portfolio.
*Pacific includes four developed market countries: Australia, Hong Kong, New Zealand and Singapore.
**Europe and Middle East includes 15 developed market countries: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Israel, Italy, the Netherlands, Norway, Portugal, Spain, Sweden and Switzerland.
Source: FactSet. The portfolio shown above reflects the MSCI World Index as of 06/30/2015. The MSCI World Index measures the performance of selected stocks in 23 developed countries. Values may not sum to 100% due to rounding.
Opportunities Abound Abroad
Many American investors focus solely on US stocks, either because they don't have the individual expertise to analyze foreign stocks, or because they believe the US affords enough performance opportunities. While it's true America is still the world's largest single economy and market, performance is cyclical and leadership in capital markets changes all the time.
The following table shows US stock market performance along with the return of the best performing countries in each year. Over the past 10 years, the US has been in the top-five performing developed stock markets only four times.
Annual Equity Return by Country
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Mr. Sunil Kewalramani is a leading consultant on global asset management.
He contributes regularly to leading business dailies and journals.