Shopping at Global Markets

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The global economic downturn shouldn’t discourage you from including non-U.S. stocks and bonds in a diversified portfolio. In fact, exposure to non-U.S. markets may help increase long-term returns and reduce risk, making it easier to ride out the market’s ups and downs. So, if you invest only in companies based in the United States, it’s never too late to explore global opportunities.

Many investors incorrectly think they’re venturing into global markets when they buy stocks of iconic global — and U.S. based — companies like Microsoft and Coca-Cola. To gain the full benefits of diversification, it’s important to invest in companies based outside the United States. It’s not enough to simply invest in U.S.-based companies that sell products or services in global markets.

Consider these reasons to diversify with non-U.S. stocks and bonds:

  • Since the United States represents about 20% of global gross domestic product (total world output of goods and services), investing only in U.S. companies means you are missing 80% of the world’s investment opportunities.*
  • The direction and degree of price movements are often different for non-U.S. stocks and bonds, compared with their U.S. counterparts. Differing price movements tend to have a balancing effect, which can help to improve returns and reduce risk — giving your portfolio a smoother ride.
  • Economic growth — a key driver of stock prices — is faster in some countries, compared with the United States. A good example is emerging markets, such as China, India and Russia, where growth rates remain higher than in the United States, despite the global economic slowdown. As of May 2013, the estimated gross domestic product growth rate was 1.6% for the United States, compared with 7.5% for China, 4.7% for India, and 2.9% for Russia.*
  • Over the long term a global portfolio made up of investments in both developed and emerging markets has the potential to outperform a domestic only portfolio. Keep in mind: To offset periods of short-term volatility, look to invest globally for long-term goals, 10 or more years.

Understand the risks involved

While investing in non-U.S. markets can lend diversification to your portfolio, you should consider the following:

  • Political or economic instability, such as the debt crisis in Europe, and falling non-U.S. currencies, can hurt returns when converted to U.S. dollars.
  • Managing risk requires broad diversification across many countries, developed and emerging markets, industries, companies, and investment styles.

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