Linda Leitz: Think big when investing | Company
Imagine being given a small portfolio of stocks. In this gift, you must choose between specific actions.
Would you choose GE or Philips? Kroger or Ahold? Hershey or Guylia? Dow or BASF?
If you’re like most consumers, as well as many financial advisors and institutional fund managers, you’ll choose GE, Kroger, Hershey and Dow. These are household names, so you’ve followed one of the common tenants of investing, which is investing in what you know.
Since these choices are not all in the same sector, you would also provide this hypothetical portfolio with some diversification. However, there is a lack of diversification that might not be easily noticeable. GE, Kroger, Hershey and Dow are all US companies, while Philips, Ahold, Guylia and BASF are based outside the US.
While the U.S. stock market makes up a huge share of the global stock market — 60% by some metrics — individual stock portfolio holdings in the U.S. tend to be oversized, nearly 80%, according to Joy Clady, a planner. certified financial.
His research identifies several reasons for this, including patriotism, concerns about individual national risks, currency fluctuations, geographic distance, and general familiarity with a particular company. The propensity to hold investments in the investor’s home country is also common outside the United States. Around the world, individual investors tend to hold the majority of their investments in their home country.
Sonya Lutter, founder of EnLite (enlite.world), points out that money and financial decisions are stressful for many people, and not making familiar investments can reduce that stress.
Wes Crill, Head of Investment Strategies and Vice President of Dimensional Fund Advisors, says: “Investors who focus solely on US markets are missing out on a world of opportunity – thousands of stocks worth trillions of dollars. – just waiting to provide diversification benefits. .”
Expanding international holdings could actually reduce risk in a portfolio. Having the vast majority of your investments in one country, with the same economic pressures, currency fluctuations and political issues, concentrates risk.
The information age has made it easier to find information on international investments. If you see the logic in expanding your global diversification, there are simple ways to do it.
If you tend to invest in mutual funds and exchange-traded funds (ETFs), there are easy ways to increase your international holdings without having to do too much research and verification. Most investment firms that offer mutual funds and ETFs offer international options. Adding or increasing quality holdings in these options can result in lower risk without sacrificing long-term returns.
We all want to have investments that help us achieve our long-term financial goals while allowing us to sleep at night. Quality investments outside the United States can be part of this strategy.
Linda Leitz is a Certified Financial Planner. She can be contacted at [email protected]