Another day, another headline about a potential Greek exit from the eurozone. The “negotiations” between European leaders and Greece over the past few days have ended in (sometimes quite bitter) stalemates, and Greece is running out of time to secure their next bailout. They owe the International Monetary Fund €1.53 billion by June 30,1 and it does not appear as though they have the cash needed to pay up.
So what does this mean for investors and your portfolios?
If Greece does not strike a deal with other members of the eurozone very soon, it could mean a messy exit from the currency bloc and could have rippling effects on Europe and the global economy. As investors, it is one thing to think about how Greece’s economy would fare on its own without the support of Europe (might not be too pretty), and entirely another to mull the rippling effects that a “Grexit” could have on the rest of the world.
Fortunately, we think there is a time-tested way to prepare your portfolio for whatever the outcome might be: make sure you are broadly diversified across asset classes and regions of the world. The crisis with Greece reminds us of the importance of not “having all your eggs in one basket,” but there are three other fairly timeless reasons we think it makes sense to own an internationally diversified portfolio:
1) Half of the World’s Market Capitalization is Outside the US – United States companies only make up about 50% of the total world’s market capitalization,2 meaning that the other 50% can be found overseas! You do not necessarily need to allocate your portfolio perfectly pursuant to where the market capitalization is in the chart below. But, we think it does make sense to have some exposure outside of the US, as it provides you with a broader set of investment opportunities and the potential for different types of risk and return characteristics.
2) International Stocks are in Some Cases “Cheaper” – price to earnings (P/E) ratios are a helpful valuation tool to show investors how a stock is priced, with a higher P/E ratio meaning you pay larger premium to own shares of a company. As you can see below, the US has better earnings per share metrics for S&P 500 companies (left chart), but those stocks are also the priciest (right chart).
3) Diversification Can Allow for Lower Risk and Better Returns – According to JP Morgan, over the last 20 years retail investors have under-diversified and underperformed,3 which is a bit puzzling! Because we also know that diversification means lowering your risk potential while also maintaining growth potential.
Have a Wealth Manager Check Your Portfolio for International Diversification
WrapManager has tools available to help you measure your portfolio’s diversification across asset classes and regions, and we can make suggestions for how to adjust your asset allocation based on your communicated goals. This can all happen within a matter of 30 minutes, and is free of charge. Get started today by calling one of our Wealth Managers at 800-541-7774 or contact us here.
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