Many investors prefer a globally diverse strategy, but some find that a portfolio focused on U.S. stocks and assets is better for their situation. Consider your time horizon and risk tolerance as well as your long-term goals to determine which might be right for you.
Looking to create diversity in your portfolio? One question is whether to include global stocks or invest strictly in U.S. assets.
Often, economic theorists talk about a globally diversified portfolio. But each investor has a unique situation, and everyone needs to weigh their personal financial goals, risk tolerance, and time horizon against the pros and cons of investing with a U.S. bias. For some, maintaining an all-American portfolio may be the way to go, but others may find a more global strategy appealing. As with most investment decisions, there are trade-offs in keeping a purely U.S.-focused portfolio, but it can also offer advantages.
Investing in Stocks Closer to Home
Pros: More stability, more familiarity with companies
Cons: Less diversity, potential to miss out on gains of global markets
With an all-U.S. portfolio, investors can invest in asset classes such as stocks and bonds that are domiciled in U.S.-based companies like Johnson & Johnson (JNJ) and Apple (AAPL). Such companies often have global exposure through their earnings and geographic sources of revenue.
For U.S. residents, investing in domestic stocks can offer a sense of familiarity, which in turn can lead to a sense of security. For example, they may know exactly where to look to learn about a company’s financial performance.
Advice tailored to your financial goals
Investors tend to be more confident in companies they know. Essentially, investors, especially those who have a tendency to react quickly, may be more willing to stick to their long-term financial plan when they feel they are more knowledgeable about their investments.
In contrast, global assets can expose investors to more risk. Many U.S. investors may be unfamiliar with nondomestic companies like Tencent or Alibaba (BABA). They may not know their products, their brands, or much about their business operations. So when the market hits a downturn, these unfamiliar investments may be a source of investor concern.
When you invest abroad, you invest in the health of another country as well as the value of its currency. When you invest in the U.S., you invest in a mature economy that has built strong economic foundations over decades. Many other countries are developing, and their economies may be more unpredictable. Thus, investing in an index that follows the S&P 500 (SPX) or the Dow Jones Industrial Average ($DJI) may be perceived as less risky than an emerging markets index.
Investing in Global Stocks
Pros: More diversification, potential for larger gains
Cons: More volatility, less familiar companies
Although having a portfolio that includes a number of U.S. stocks can have several advantages, there are also potential downsides to consider.
Primarily, investors who avoid investing in foreign equities, currencies, or bonds may lose out on gains that can be much more significant than many U.S. assets.
When you invest globally, you invest with more diversity, including more growth stories. The United States has one of the highest levels of output in the world, but its annual growth rate is in the low single digits. Countries like China and India arguably have more recent attractive and compelling growth stories. A portfolio with a U.S. bias may experience less volatility but could potentially lose exposure to global growth stories and might be invested in a narrower set of opportunities.
Investors with a shorter time horizon may find investing closer to home may work well. If you have a longer term for investing, a global portfolio could help you access more potential growth.
Investing a portion of your portfolio in foreign companies can provide added diversification, which can be beneficial. But deciding which is the better strategy is ultimately up to the individual investor. A financial advisor can help you analyze your personal situation and financial goals.
TD Ameritrade investors who want to tailor their holdings to domestic assets might want to consider Personalized Portfolios offered by TD Ameritrade Investment Management, LLC, which offers advice and customized portfolio choices specific to various situations. Personalized Portfolios includes choices for investing with a U.S. bias. For a free initial consultation, call 800-527-3847 or visit a TD Ameritrade branch.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
Advisory services are provided by TD Ameritrade Investment Management, LLC (“TD Ameritrade Investment Management”), a registered investment advisor. Brokerage services provided by TD Ameritrade, Inc. TD Ameritrade Investment Management provides discretionary advisory services for a fee. Risks applicable to any portfolio are those associated with its underlying securities. For more information, please see the Disclosure Brochure (Form ADV Part 2A).
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, and a subsidiary of TD Ameritrade Holding Corporation. TD Ameritrade Holding Corporation is a wholly owned subsidiary of the Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2020 Charles Schwab & Co., Inc. Member SIPC.