Investing for the Future: Think Global

Globe held at side

In the next few years, expect a big change in stock market trends.

In my constant search for great global stocks, international travel is a big part of my life. And no matter how interesting it is for me to travel overseas exploring new investment opportunities for you, there is a special feeling when I return to America.

For one thing, the air is a lot cleaner. It’s also nice to put my head down on my own pillow and get back to my normal routine and all the familiar surroundings.

In much the same way, investors also feel more comfortable putting money to work in companies close to home. The technical term for this is “home bias,” and researchers find that one persistent trend in investing is the inclination by investors to favor their home stock market.

One team of researchers (Coval & Moskowitz, 1999) even found investor preference for companies located in their home city or state.

Why Home Bias Shouldn’t Apply to Investing

I think it’s great that investors back local companies where they shop or where their friends work. But when you really think about it, this home bias is puzzling. Why should the world’s best companies with the best growth prospects just happen to be in America or wherever your home country happens to be?

In investing, where a company is based means less and less; what it does and how it performs are what matter now.

This is especially true for emerging markets, as the value of their stock markets play catch-up to their contribution to global economic growth and share of the global economy.

The Time to Invest is Now

While no one can predict how markets will move going forward, it seems smart to start taking some of your profits and adding more overseas exposure to your portfolio.

Though it won’t be anything resembling a straight line, over time the market value gap between U.S. stocks and other global stocks will narrow.

The time to buy overseas stocks is now, but the strategy you use to take advantage of this mismatch is critical.

Move incrementally and buy emerging markets when they are down and out. Stick with high-quality companies showing good growth and strong balance sheets. Diversify across many countries and favor those that respect private capital, rule of law, and open markets.

Also keep in mind that the best way to capture the growth and upside potential of overseas and emerging market stocks is through old-fashioned, bottoms-up stock picking— the art of analyzing individual stocks based on their own merits, not those of sector, cycle, or market performance.

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