Making the Case for
Global Diversification

Many of the most recognizable and quintessentially American brands on the market today are not owned by U.S. companies. Just consider that Gerber baby food’s parent is Swiss company Nestle, or that grocer Trader Joe’s is owned by a German private equity firm. Even Budweiser, the classic American beer, is owned by Belgian beverage giant, InBev.

Just as consumers regularly choose a diverse, global basket of goods and services in their everyday lives, so too should investors. Today, more than half of the world’s market capitalizationThe total value of all outstanding shares quoted on a stock exchange. It is calculated by multiplying the total number of shares in issue by the market price. It can also denote the total value of all the securities listed on a stock exchange, or the total value of one sector of a market's listed securities. is based outside the U.S.

Therefore, a globally diversified portfolio — one that includes investments from different countries and regions around the world — is positioned to weather market ups and downs, and often provides more stable returns over time. That’s because the risk is spread among many economies, not just concentrated within the U.S.

To be sure, the stocks of companies based in the U.S. have been performing well in recent years. But investors need to keep in mind that this is not always the case. Over the past four decades, domestic and international stocks have alternated in terms of performance. For instance, between 2003 and 2009, international stocks beat U.S. stocks by a fairly wide margin. Since then, the cycle has switched back, with U.S. stocks outperforming international listings. Economists suggest this cycle will swing back the other way again.

For investors, this isn’t a matter of market timing, but exposure. A globally diversified portfolio helps to manage volatility, offset losses and reduce overall risk. But equally important, a portfolio with a good blend of domestic and international investments help to drive long-term appreciation. With so many of the world’s biggest companies based outside the U.S., investors would be smart to include these listings in their portfolios.

Of course, not all international markets are created equal. Some, like Germany, France and Japan, are similar to the U.S. in terms of political stability, economic infrastructure, and regulatory environments. Markets in other, less developed economies — China, Russia and South Africa, for example — are often referred to as emerging marketsThe financial markets of developing economies.. Even though they have fairly large populations and labor forces, they are characterized as emerging because of their rapid growth and expanding middle class.

Investors interested in including emerging markets as part of a diversified global portfolio, need to keep in mind a few things. First, because these markets are so focused on growth (and can have a higher growth rate per year than developed economies like the U.S.) they often deliver higher returns. The flip side of that, of course, is that they are relatively risky investments because of their economic instability and frequent political unrest. Mitigating these risks means figuring out your risk tolerance and then allocating the percentage of your portfolio to emerging market stocks that you feel comfortable with.

One of the best ways to navigate international markets is by working with a broker that has a deep well of knowledge about global trading. Interactive Brokers (IBKR), a Greenwich, Connecticut-based securities firm has been in business for 41 years and has $7 billion in equity capital. It has been through countless market cycles, both at home and abroad, and understands the fundamentals of global investing. It can provide investors with direct market access to stocks, options, futures, foreign exchange and ETFs, all from one account.

Further, with IBKR, investors can access market data 24 hours a day, six days a week, to stay connected to all global markets. The firm works in 120 global stock exchanges in 31 countries, and investors can trade in 23 currencies, with low fees and unparalleled transparency. IBKR executes nearly 1 million trades per day and provides investors with a wealth of knowledge and market intelligence through its Traders’ Academy online learning portal. With so much of the world’s growth happening outside the U.S., investors need to know what’s happening around the globe. Interactive Brokers empowers investors to make the smart choices for their portfolios — and their futures.