Many U.S. investors have stuck to what they know – the U.S. markets. However, as more are adding international exchange traded funds, investors should get a sense of how much is needed for a diversified global portfolio.
“Many investment managers no longer view the U.S. stock market as a separate asset class from the rest of the world’s stock markets,” Rick Kahler, president of Kahler Financial Group, on Morningstar. “Today, they regard it as one component of a global asset class of stocks.”
Diversification is the main reason investors should include international exposure. Kahler explains that for the same reason one wouldn’t hold just one stock in an investment portfolio, one should not focus entirely on the U.S. either.
“It’s as important to diversify among countries as among companies,” Kahler added.
While investors have shown a greater demand for foreign equities, there is still a home bias among many investment portfolios. According to the Investment Company Institute, in 2014, a quarter of new cash put into American mutual funds went to overseas-oriented mutual funds, compared to 15% in 2004.
However, the U.S. market makes up about 50% of the global market capitalization. Consequently, investors who want to follow a true globally diversified investment theme would only hold about half their portfolio in U.S. equities and the rest in international holdings.
Additionally, looking at other country market capitalization, developed markets, which include those in Europe, Australia Pacific and Japan, account for 40% of the total global market-cap. The remaining 10% account for the emerging markets, Southwest Asia and Latin America.