contributed by Rachel Stever
About a hundred years ago my great-grandparents left rural France for the promise of a new and better life in the United States. They passed down stories of the old country and various cousins left behind, but never thought that it might be nice to go for a visit or send pictures of a new grandbaby. As far as they were concerned, if you wanted to see the world you joined the military or became a missionary. Most of the food they ate came from the community and the car they eventually bought was built in Detroit.
My great-grand aunt saw something more to her life than staying in Idaho. Sister Nathaniel came back to Boise for a visit when my mother was a girl, bringing photos she had taken of children at the Chinese orphanage she worked in. My great-uncle went off to war; when he came back he brought a set of dishes and a several dolls he found while on leave in Japan. These were novelties amongst my family and neighbors. They never imagined that just a couple of generations later their children’s homes would have more items built in Asia than in the US.
Made in the USA
We still think of Detroit when we think of American cars, but Ford has factories and operations in nearly a dozen countries. Toyota builds some of their most popular cars in the US and Canada. It’s rare to find a large company with operations in only one country; national economies are becoming more and more entwined as trade expands and technology advances. In fact, when I was searching for a bowl to replace a missing piece from my great-uncle’s set of Japanese dishes, I searched the internet and bought a replacement from a nice gentleman in France.
Globalization, the process of international integration, is virtually unavoidable. But we still try, biasing our purchases, and investments, to our home countries. In 2009, the United States accounted for about 42% of the global equity market. At the same time, the average US-based advisor was investing almost 64% of their equity allocation in the US market.1 This same “home bias” investing behavior happens all over the world, no matter how large the local market is. There can be some benefits to having a home bias in your portfolio. Some countries offer tax benefits to investing in domestic companies or regulations limiting how much you can invest internationally. But there are also benefits to having a globally diversified portfolio.
Having a portion of your portfolio invested in emerging market equities can help boost returns as those regions benefit from economic growth and helps offset the slower growth developed economies have experienced. We invest in foreign equity funds that may benefit from currency exchange rate changes and from economic growth around the world. We also invest in foreign bonds to offer an expanded opportunity set beyond what the US market provides. We are all affected by economic conditions, but the effects on a portfolio can be dispersed and the risk reduced by diversifying.
A Small World
In the next year or so, I hope to take a trip to France. Maybe I’ll visit the little town my family left so long ago, see how it compares to the stories I grew up with. And I’ll bring back a doll for my niece, just like my great-uncle did for his niece so many years ago.
1 Source: 2009 Dimensional Advisor College study