Diversify Beyond US Stocks in Turbulent Markets

The current global economic landscape is marked by an unusual confluence of uncertainty factors: trade tensions between major powers, climate change posing a pressing threat to economies worldwide, and rising nationalism creating a toxic atmosphere for international cooperation. Against this backdrop, investors should reevaluate their portfolios and consider diversifying beyond the tried-and-true US stocks.

A reliance on US stocks can leave investors exposed to market volatility and reduced benefits from diversification. The S&P 500 index, often touted as a benchmark for broad market exposure, has historically been skewed towards large-cap companies with significant domestic operations. This concentration of assets in one country and region means that even if you’re invested in a diversified ETF or mutual fund, your portfolio is still vulnerable to shocks affecting the US economy.

Emerging markets offer a potential hedge against global uncertainty. These countries have experienced rapid economic growth over the past few decades, driven by large-scale infrastructure projects, urbanization, and increasing trade ties with other nations. As they continue to develop their economies, emerging markets are increasingly correlated with each other, creating an attractive diversification opportunity for investors.

Non-US developed market ETFs can provide a low-cost way to tap into these growth opportunities while reducing portfolio risk. The MSCI EAFE Index, which tracks stocks in Europe, Australia, and Far East Asia, is one such option. Another is the FTSE Developed ex US Index, which offers exposure to high-quality companies in developed markets outside of North America, including Japan, Germany, and the UK.

Incorporating emerging markets and alternative asset classes can help mitigate global uncertainty by reducing reliance on any single region or sector. For example, adding a small allocation to real estate investment trusts (REITs) can provide exposure to property markets in developed economies, while also benefiting from potential appreciation in emerging market cities. Commodities – such as gold, oil, and agricultural products – can serve as a hedge against inflation and currency fluctuations.

Creating a diversified portfolio beyond US stocks requires careful consideration of several factors. Selecting ETFs or mutual funds that track broad indices rather than single-country or sector-specific benchmarks is crucial. It’s also essential to pay attention to fees: choose low-cost options with transparent expense structures. Regularly rebalancing your portfolio to maintain target allocations and minimize risk is also necessary.

A real-life example can illustrate how to implement a globalized portfolio effectively. Suppose you want to allocate 20% of your portfolio to emerging markets while maintaining exposure to developed markets. You could start by investing in the iShares MSCI Emerging Markets ETF (EEM), which tracks the MSCI EM Index, covering more than 80% of the market capitalization of emerging economies. To balance this out, add a smaller allocation – say, 5% – to a non-US DM ETF like the Vanguard FTSE Developed ex US ETF (VEA). This combination will give you broad exposure to both developed and emerging markets while reducing reliance on any single region or sector.

This approach can be replicated in practice by regularly reviewing your portfolio’s asset allocation and making adjustments as needed. By following this strategy, investors can create a more resilient portfolio capable of weathering the storms that are inevitably part of global market dynamics.