Once upon a time, U.S. investors focused on Wall Street, home of the New York Stock Exchange, if they wanted to purchase shares in their favorite companies. Now, there is a world of equity investment opportunities to explore, including strategies designed to reduce risk or enhance potential returns.
If you think China’s manufacturing output will improve in the next year, you could invest in one of the many equity funds that are invested in Asia’s largest economy. Or you could allocate some of your equity portfolio to funds or equities themselves investing in India, Brazil, Southeast Asia or Eastern Europe — or combinations of those emerging markets.
And don’t forget about opportunities in the developed world, as well, including Canada, Europe and Japan — a nation that some analysts believe has strong upside potential in the next six months.
Historically, equities have outperformed other types of asset classes, such as bonds and gold. They have offered higher return opportunities than conservative investments, such as money market funds or bonds.
However, stocks are also more volatile than other types of assets, at least in the short run. That’s one reason why investors should usually avoid putting all their money into equities. Holding bonds, real estate and other assets can cushion those market swings and allow investors to sleep well at night.
Recognizing the benefits of diversification, sophisticated investors may apply a similar strategy to their equity holdings. Someone who puts 60 percent of a portfolio into equities, for example, might split that portion into U.S. and non-U.S. equities in order to be exposed to different markets around the world.
A younger investor, for instance, might focus on growth stocks or funds that strive to deliver higher long-term returns, regardless of short-term volatility. On the other hand, investors nearing retirement might increase their allocation toward a balanced portfolio that aims for lower volatility in exchange for somewhat lower returns.
Some investors only purchase shares in “blue chip” companies with large capitalization (large caps). Others focus on “mid cap” or “small cap” companies that may have significant growth potential. Investors can also pick industry-specific equity funds or purchase shares in sectors such as technology, energy, banking or manufacturing.
Understanding these different kinds of equity strategies is very important for investors who want to expand their holdings beyond U.S. companies. While geography is an important consideration, it is certainly not the only variable to consider when diversifying your portfolio or investing in a new equity. With that being said, diversification is a strategy, not a panacea, and doesn’t guarantee a profit or protect against a loss.
While each nation has an individual profile in terms of economy, population, government policies, major companies and many other factors, investors tend to split the world into emerging and developed markets. The emerging markets typically have greater growth potential but carry higher risks compared with the developed world.
Another of the important differences is that these two broad sets of markets have different growth cycles. For instance, when the developed world was in the grip of the so-called “great recession” in 2009-10, the emerging markets helped keep the global economy afloat. In fact, emerging market economies outperformed those of the developed world for several years.
Now, the stronger U.S. economy is once again a major driver of global growth, and Europe and Japan appear to be on the upturn, as well — especially if their central banks ease tight credit policies that have slowed business growth.
Therefore, investors may want to consider allocating more of their equity portfolios to the developed world in order to pursue potential opportunities. Talk with your financial advisor and take a look at the many global equity strategies to see what makes the most sense for your personal situation. If you stay focused on your goals and understand your risk tolerance, you will have a solid foundation for building your global equity portfolio.
Andrew Menachem, CIMA, is a wealth advisor at the Menachem Wealth Management Group at Morgan Stanley in Aventura. Views expressed are those of the author, not necessarily Morgan Stanley, and are not a solicitation to buy or sell any security. The strategies and/or investments referenced may not be suitable for all investors. Follow Menachem on Twitter @AMenachemMS.