Humans are naturally hardwired to resist change and the usual stance is to keep the risk as low as possible. Change may induce fear or uncertainty and the body tries to protect itself in such scenarios. This is a number of times also reflected in people's investment strategy. If people are trying to keep their risk absolutely low, they save and invest in cash or government backed securities and if they are willing to take on more risk they may be heavily invested in the equities market. My recommendation to everyone is to only take risk until it does not interfere with your sleep or day to day activities. There is no point in taking high risk if that makes you feel panicky or makes you constantly question yourself. Although, I must say its definitely worth testing the waters by taking small risks and understanding your thresholds.
One of the best strategies to reduce the risk is to diversify your portfolio as much as possible and ensure you have a big enough emergency fund. I talk about various diversification strategies to beat inflation in my article here, if you have not read it then I highly recommend reading it. One of those diversification areas is international markets. Based on research done by sifma.org, US equity markets represent 42% of the $125 trillion global equity market cap, that still leaves other international markets with roughly around $73 trillion market cap.
International markets are divided mainly into 2 categories - Developed markets like UK, France, Japan and Emerging Markets like Brazil, Russia India, China. Another way how large funds could treat various international markets could be based on their location on the globe - Asia-Pacific (Australia, Japan, Hong Kong, Singapore), Europe (United Kingdom, France, Spain, Germany), Latin America (Brazil, Mexico, Argentina, Peru).
If you are a long term investor and have at least a 5Y to 10Y outlook, the numbers look very promising and show opportunities in the global economy. Below are the top 5Y and 10Y trends in descending order for country stock indexes.
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| Highest 5Y Country Stock Index Outlook (Source: lazyportfolioetf.com) |
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| Highest 10Y Country Stock Index Outlook (Source: lazyportfolioetf.com) |
US investors can leverage various investment vehicles to invest in international markets using Mutual Funds, Exchange Traded Funds (ETFs) or American Depository Receipts (ADR). Most large brokers will have these investment vehicles available for their customers.
Investing in international markets comes with its own risks which could be higher costs, political uncertainty, fluctuations in market value, changes in currency exchange rates etc. Depending on how much investors know about the economics of a certain country, they may elect to invest in specific country indexes, specific stocks or broader global indexes. Maintaining some exposure can definitely bring diversification to your portfolio and hence its highly recommended.
Given the current geo-political situation and uptick around oil prices and other commodities, it is interesting to see how some country stock indexes so far have spiked as compared to the US which is good for people who have exposure to these regions.
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| Year To Date Country Stock Index in Descending Order (Source: countryeconomy.com) |
The moral of the story is to not keep all your eggs in one basket and remember that a healthy diversified portfolio could be really beneficial for you in the longer run.
(Disclosure: Please review the Disclaimer section prior to any investments.)