Personal Wealth Management / Expert Commentary

The Importance of Diversification and Investing Globally

Why should you invest globally? What could your returns look like over time if you do? Ken Fisher, Fisher Investments’ founder and Co-Chief Investment Officer, answers these questions and more in this video.

While many investors may be biased toward investing in stocks based in their home country, this isn’t necessarily the best approach to investing, and it limits the level of portfolio diversification you can reach. Different countries represent different categories of stocks—just like Consumer Staples stocks have different qualities from Financials stocks. Different categories trade leadership over time. No one category is best! This is also true of countries. While one country may perform well in a given period, over very long periods, performance tends to even out. This means countries trade performance leadership, and investing in only one country can mean missing out on better returns elsewhere for a long time. This phenomenon is due to supply and demand factors. Like any other widely traded good, stocks’ prices move based on supply and demand. Over long periods of time, supply trumps demand, as companies can expand or contract their stock supply on a near-infinite basis. If a country has outperformed (or underperformed) for a long time, eventually supply factors will adjust accordingly, leading to similar returns over decades-long periods—which is the time frame many long-term investors should care about most. Watch now to learn more!

Transcript

0:02
Almost always, and almost everywhere,
0:06
people get this wrong.
0:08
They tend to prefer to own stocks from their own country.
0:13
In America, the biggest and broadest stock market in the world,
0:17
most diverse, but also in small countries.
0:23
The fact is that when you think of broad categories of equity,
0:27
the very long returns-- 30 year returns of them--
0:31
tend to be almost identical, if not identical,
0:34
to other broad categories of equity, if the categories are calculated correctly.
0:40
There's a lot of incorrect ways to calculate equity returns.
0:43
But calculated correctly, in the long term they get real similar,
0:46
because in the long term, as I wrote about in my "Only Three Questions" book,
0:51
shifts in supply seven, eight, ten years from now,
0:53
are much more important in determining pricing
0:56
than shifts in demand and can overwhelm any change in demand.
1:01
Demand fluctuates in the short term based on human emotion.
1:05
Supply can be increased or decreased nearly infinitely
1:08
to overwhelm any perception of superiority in category.
1:12
And so, if you look at U.S. vs. foreign,
1:15
and you go back close to forever, they go back and forth,
1:19
back and forth, back and forth,
1:20
of U.S. doing better than foreign for a few years,
1:23
foreign doing better than U.S. for a few years.
1:25
Right down the middle is the totality of global,
1:28
since the world is a little more than half U.S. equities in money value.
1:33
And what that means,
1:34
is you really get a smoother ride to that long term equity return
1:39
if you don't focus on your local home country bias
1:42
and instead invest globally, diversify globally,
1:46
aim at the world market.
1:48
In some periods, you'll do worse than the American market,
1:51
or if you're French, the French market,
1:53
or if you're Japanese, the Japanese market.
1:56
And sometimes, for a long time.
1:59
But in the end, it comes back to being the same.
2:02
And if you're in one that underperformed for a long time, global helps you.
2:06
If you're in one that outperforms for a long time,
2:08
it's not too long before, if you're just in that country,
2:11
you're going to have a disappointing time.
2:14
Think globally, invest globally.
2:18
It really gets you to the equity return in the long term in the smoothest path.

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