Making the Case for International Exposure

“Why would I invest in anything other than the S&P 500 if it continues to do so well?” This is a question that is commonly asked by many of our clients over the past few years. To truly optimize your portfolio and ensure you’re not missing out on potential opportunities, it’s crucial to understand the value of international equity exposure. At our firm, we believe in the principle of market efficiency, and this philosophy extends beyond the American borders.

One of the fundamental principles of our investment philosophy is diversification. By spreading investments across different assets, industries, and geographical regions, you reduce the risk of a single event impacting your entire portfolio. Domestic markets experience periods of volatility, whether due to economic downturns, political events, or other factors. By including international investments, you’re adding another layer of diversification that can help buffer against domestic market fluctuations.

Another cornerstone in our investment philosophy is market efficiency, which suggests that markets prices typically reflect all publicly available information. By diversifying internationally, you align your portfolio with this principle by accessing various markets that are not directly correlated with each other. This approach helps to ensure that your investments are balanced and that you are not overly reliant on the performance of any single market or economy.

There is no crystal ball that will tell us if or when the domestic market will take a downturn. Diversifying internationally can enhance your investment strategy, even when domestic markets are outperforming. Our firm’s belief in market efficiency is applicable worldwide, highlighting the importance of international exposure to capture potential gains and balance risk across your portfolio. Below are what some of the major names on Wall Street predict the next decade to look like:

Once we recognize the value of global diversification, the next step is to determine the optimal allocation within your portfolio. Rockbridge’s philosophy aims to replicate the global market. We analyzed various indices amongst all the asset classes and came up with a portfolio that reflects the world based on market capitalization. From our research, we found that the United States represents ~62% of the global equity market and the rest of the world is ~38%. You would maintain that distribution on the equity side as you add bonds to the portfolio. For example, if you were aiming to have a 60% stock and 40% bond portfolio, you would have ~37% allocated towards domestic stocks and ~23% of your portfolio invested in international stocks.

It’s essential to approach investing with a long-term perspective. Short-term market performance can be enticing, but the key to successful investing is aligning your strategy with long-term goals and historical trends. Incorporating international investments into your portfolio is about embracing the principles of market efficiency and diversification. If you have questions about how to diversify your portfolio effectively or need assistance with international investments, Rockbridge is here to guide you.