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Why International Companies Deserve a Place in Your Portfolio

Every day, millions of Americans increasingly use products made or assembled in countries around the world. Cell phones, refrigerators, automobiles, furniture and airplanes are just a few examples of internationally-produced goods. Yet many U.S. investors tend to purchase mutual funds that own only U.S. domiciled companies. Due to this home country bias, investors could be missing out on the potential opportunities offered by international stocks.

Access to Growth Outside the U.S.

While the U.S. economy is one of the largest in the world, many other areas of the world may be growing at a faster pace. As a result, the U.S. has become a much smaller part of the overall global economy. According to the International Monetary Fund, emerging and developing economies accounted for 70% of global growth in 2015.

Many developing countries have less mature markets compared to the U.S. but have implemented policies that promote economic growth. These policies encourage companies to expand their business, invent new products, sell more goods and hire workers. In addition, many emerging economies have large populations of young consumers experiencing rising wealth.

As an investor, it is possible to gain access to this growth by allocating a portion of your portfolio to international companies with access to these faster-growing economies.

Increased Diversification

It’s generally not wise to put all your eggs in one basket. Many asset allocation studies have found that portfolios made of U.S. and non-U.S. investments have historically increased diversification. Diversification can help you meet your long-term financial goals by enhancing a portfolio’s return and reducing risk. Compared to U.S. stocks, international companies can move in different directions or different degrees, smoothing returns over time.

Attractive Risk and Return Characteristics

Because of the differences in performance between U.S. and international stocks, an overall portfolio that includes domestic and international companies could achieve similar returns as those offered by U.S. stocks but with potentially less risk. The diversified portfolio may also achieve increased returns with the same amount of risk as a portfolio made of primarily U.S. stocks.

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