The Case for International Diversification
It pays to diversify a stock portfolio globally, even though most large companies are global.
A version of this article previously appeared in the May issue of the Morningstar ETFInvestor.
How strong is the case for investing in stocks outside the United States? Vanguard founder Jack Bogle has argued that U.S. investors don’t need to venture into foreign markets because 1) most large U.S. stocks generate a large portion of their revenue outside the U.S., 2) foreign stocks have greater currency and--in many cases--greater macroeconomic risk, and 3) returns across different markets should be similar over the long term. With similar expected returns and greater risk, non-U.S. stocks aren’t appealing--in Bogle’s view (which Vanguard doesn't share). But investors who limit themselves to the U.S. market miss nearly half of the world’s available equity market capitalization. A closer look reveals that while the benefits of international diversification will likely be modest for U.S. investors, non-U.S. stocks should have a place in most investors’ portfolios.
Alex Bryan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.