Financial Planning

Why Global Diversification Matters

Protect your portfolio by taking your investments international

You've likely heard about the importance of having a variety of “buckets” in your retirement investment portfolio, such as stocks, bonds and cash. You can take this a step further by ensuring that you hold a mix of investments within each asset class.

In particular, your stock portfolio should include investments from global markets in order to gain exposure to potential growth worldwide, says Derek Klock, an assistant professor of practice in finance and coordinator of the certified planning program at Virginia Tech.

"You want to have investments that are outperforming while others may be underperforming—that's the essence of diversification," Klock says. Diversification helps reduce risk: any losses in one set of investments may be offset by gains in other asset classes.

An increasingly global economy

Globalization has increased dramatically over the past three decades. The growth of multinational financial firms means money moves more easily between countries and regions. And regions once off-limits to U.S. investors, such as Eastern Europe and China, now regularly do business with the U.S. "All of these things result in the synchronization of developed economies," Klock says. "Everybody ebbs and flows together."

Today, the same forces that move U.S. markets—such as concerns over a fiscal cliff in the U.S. or the European debt crisis—tend to affect international markets, too. This phenomenon is called correlation.

The case for diversification

The fact that many global markets move in concert has caused some investors to question the importance of international investments. However, there's still good reason to add some international assets to your mix. For example, the gross domestic product of the U.S. accounts for just 22 percent of the global economy1. That means future economic growth—and market returns—will come from all over the world, not just the U.S.

Many experts suggest that international stocks should account for 10 to 25 percent of your stock portfolio, depending on your risk tolerance and the other assets you own. "You can stabilize your portfolio by including stocks from a region of the world that is cycling up while another might be cycling down," Klock says.

How to invest globally

Adding some foreign exposure to your investments doesn't have to be complicated. A SunTrust advisor can help you identify a mutual fund that owns international stocks and is appropriate for your investment portfolio. Or consider a target date fund, a diversified portfolio—typically including international stocks—that is overseen by professional managers.

When it comes to your investment portfolio, geographic diversity is as important as mixing up the types of assets you invest in. Spreading your investments around the globe can not only provide protection from uncertainty at home, but also offer new opportunities for returns. 

1 http://data.worldbank.org/indicator/NY.GDP.MKTP.CD/countries

International investments are subject to special risks, such as political unrest, economic instability, and currency fluctuations. Diversification does not ensure against loss and does not assure a profit.

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