Should You Stay Domestic or Go International for Higher Profits?
Stocks haven’t done much so far this year. The S&P 500 is up just 2.8% while the Dow Jones is actually down around 1.4%. Volatility has ranged from extreme lows to extreme highs this year alone but currently stands at a mild 13.37. The stagnation of US markets has led some investors to think outside of the country for profits.
Going international instead of staying domestic could open up new possibilities for investors. There are additional benefits gained by broadening your investment environment, such as diversifying against interest rates and economic events that impact only the US. But it also opens you up to new risks like foreign exchange currency loss. Understanding the risks and benefits of both strategies will help you maximize your profits while keeping risk at a minimum.
There are a lot of benefits to be gained by staying in the US for your investment portfolio. For one, you are far more likely to be familiar with domestic companies and economic policies that allow you to employ strategies like sector rotation in your portfolio.
Diversification can be attained in a domestic portfolio by holding stocks of different sizes in various sectors. Additionally, many US companies derive much of their income from overseas operations, giving investors international exposure without having to invest directly in foreign markets.
It’s also more difficult to invest in foreign companies as opposed to domestic ones. Financial information can be harder to come by, while accounting practice differences can make analysis a challenge.
There are a number of advantages investors gain by broadening their investment portfolio to include international stocks. They reduce the risks of negative economic events that affect only the US and gain the diversification of foreign economies.
Investors can also take advantage of different economic growth rates. The US is a large well-established economy, which makes it stable but also gives it a relatively small GDP growth rate. Foreign economies may have much higher GDP growth rates, giving investors higher returns.
It also adds a new layer of diversity to an investment portfolio. Different interest rates and political environments reduce the risk that a US-only portfolio has. Severe domestic market drops can be counter-balanced with a well-diversified international portfolio.
For investors that choose to stay domestic for their portfolios, it could be helpful to add at least a few international assets to the list for diversification purposes. Noted investor and founder of Vanguard John Bogle is known for his belief that investors don’t need to seek out international holdings for diversification reasons, but the advent of globalization may make this an outdated notion. Investors should carefully weigh out the pros and cons of staying domestic or going international and decide which best suits their investment goals.