Credit: Shutterstock photoInvestors are creatures of habit. They do the same thing over and over again without a thought of approaching the market differently. Whether they invest in stocks, bonds, commodities or even currencies, everyone has their own entrenched way of choosing investments.
However, the best investors think outside of the box when searching for ways to deploy their capital. They adapt their portfolios to capture opportunities in the market, wherever they might arise.
For the average investor, the best way to do this, especially right now, is to look at international stocks. Even with international stocks outperforming the U.S. markets over the last quarter-century, many domestic investors still shun global equities. The reasons are many, but for most investors they boil down to fear of the unknown and loss aversion.
But the history shows us that these fears are unreasonable. Here's why every investors should try their hand in the international markets.
1. Outperformance
Believe it or not, the U.S. stock market has not been the world's top performing market over the last 25 years. Even in 2017, with the Dow soaring 25%, the S&P 500 adding 19% and the tech-heavy Nasdaq booking 28% gains, the United States took fifth place in the global performance ranking.
In 2017, Argentina's stock market exploded 77%, hitting a record high in the final week of the year. These gains came on the back of a 45% surge in 2016, driven by President's Mauricio Macri's sweeping pro-business economic reforms.
Make no mistake, the Argentinian economy suffers from high inflation and a struggling currency, but it is quickly morphing into a haven for South American business.
Turkey and Nigeria ended the year in second and third place, with 48% and 42% gains respectively. Hong Kong's widely followed Hang Seng index earned forth place in the global rankings with a 36% advance.
Of course, not every international stock market posted stellar gains. Qatar, for one, led the losers lower with an 18% drop.
But given the outperformance of the U.S. stock market last year, it's extremely likely that the developed world, and even second- and third-tier economies will trend upward for the next decade or longer.
2. Diversification
Diversification is often the key to protecting against catastrophic downside in the stock market, and what better way to diversify than by spreading your risk across nations?
Despite the growing correlation between domestic and foreign equities, seeking diversification internationally still makes investing sense, primarily as a way to access lower market valuations. While U.S. stocks trade for roughly 20-times trailing earnings on average, international developed markets average in the 15-times trailing earnings area and emerging markets trade near 13 times. These numbers seem to suggest greater growth potential in international and emerging markets than in the United States.
3. Global Growth
The United States is a mature market, meaning relative growth is not as rapid as other economies. Growth is cyclical, and investing internationally enables you to capture profits from shifting economic cycles. The global economy is in a growth phase, making now the ideal time to diversify internationally.
Furthering the growth case, The International Monetary Fund (IMF) is forecasting global growth to continue at a steady rate. An overall expansion of nearly 4% is forecasted in 2018. For developing economies, the expected rate improves to 5%.
Specifically, the IMF projects 7% GDP growth in India and over 6% in China in 2018, building a compelling case for international diversification in these nations.
4. Greater Choice
Investing outside of the United States provides a much greater choice of companies and opportunities. While information may be harder to come by and companies more challenging to assess, the potential reward can be much greater.
5. Currency Fluctuations
Often viewed as a negative, currency volatility works both ways. If the exchange rate moves in your favor, you could end up earning a little premium on your investment.
Risks To Consider: Despite all the benefits of investing internationally, substantial risks exist. Political risk is something we really don't have to be worried about in the United States. However, particularly in emerging markets, political risk can be very high. A change of regime or economic philosophy can send stocks plummeting. However, the flip-side to political risk is that a more pro-business regime may come into power, sending stocks soaring.
Action To Take: Consider adding international stocks to your portfolio. The easiest way to do so is via ETFs. Purchasing region- or country-focused ETFs will provide diversified exposure to theglobal market
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
