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Can Global Diversification Lead to Smaller Losses?

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Performance isn’t just about gains. It’s also about minimizing losses. Greater global diversification can help with that.   

Often investors shy away from international investing because of its special risks, which include geopolitical events, changes in currency exchange rates, the potential for illiquid markets, and the challenges that come with foreign tax and accounting regimes. But these risks have been offset by the greater diversification of risk that investing globally provides.

Over the past 45 years, international and U.S. markets posted similar returns over rolling 10-year periods. But those who invested only in the U.S. experienced deeper and more frequent downturns than those who took a global approach and invested in both the U.S. market and international markets.

During the worst of those 10-year periods, the MSCI USA Index fell 35%, or an annualized 4.2%. The MSCI World Index, which is made up of stocks from around the globe, including the U.S., lost 23%, or an annualized 2.5%. But, during that same period, international stocks measured by the MSCI EAFE Index, which does not include stocks from the U.S. or Canada, lost only 10%, or an annualized 1%.

Now, compounded over the 10-year period, that was a 26% difference in portfolio value between only international and only U.S. stocks.

Your international allocation should be 25 to 50% of your stock market investments. If not, you may be missing out on some of the best companies in each sector.

Learn about how sectors are more important than countries in the next video.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

Definitions

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index designed to measure the equity market performance of developed markets, excluding the US & Canada. It consists of 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

MSCI All Country World Index covers over 9,000 securities across large-, mid- and small- cap size segments and across style and sector segments in 46 Developed and Emerging Markets.

The MSCI USA Investable Market Index (IMI) Consumer Discretionary is designed to capture the large-, mid- and small-cap segments of the US equity universe. All securities in the index are classified in the Consumer Discretionary sector according to the Global Industry Classification Standard (GICS®).

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