Global Diversification Still Requires International Securities

An outstretched hand with a digitally superimposed white outline of a world map with connecting lines and circles suggesting global connections or communication.

Investors often ask if globally diversified stock portfolios are necessary when the US stock market has many multinational companies or those earning revenues from non-US countries. The data suggest these companies are no more successful at global diversification than a faux mane is at turning a golden retriever into a lion.

We can test the global diversification benefit of companies with non-US revenues by looking at their average returns in months when US stock returns and international returns diverge. Stocks offering sufficient non-US exposure should presumably move more in line with the international market. However, companies with non-US revenues appear to merely track the broader US market on average. In particular, when the US market is down—and investors would hope for global diversification to kick in— companies with non-US revenues are similarly down. These results echo academic evidence showing that stock prices tend to move based on where they trade more than where the business resides.1

Developed ex US and emerging markets stocks combine for about 39% of the global stock market.2 That’s a meaningful chunk of the equity investment opportunity set, and based on these results, they have potential to be a pivotal complement to the US market.

Exhibit 1
One of These Things Is Not Like the Other
Average monthly returns when US and developed ex US stock returns have opposite signs, January 1979–December 2022

A bar chart comparing the performance of the S&P 500 to the MSCI World ex USA in terms of positive and negative months. The upper section shows the number of months when S&P 500 is positive and MSCI World ex USA is negative, with separate bars for UBS Finns without RoCEQ, UBS Finns with RoCEQ, and MSCI World ex USA Index (sort club). The lower section displays the number of months when S&P 500 is negative and MSCI World ex USA is positive, with the same categories compared. Each category is represented by different colored bars: UBS Finns without RoCEQ in green, UBS Finns with RoCEQ in yellow, and MSCI World ex USA Index in red. The values range from -40 to 40 on the vertical axis.

Past performance is not a guarantee of future results.

Source: Dimensional, using CRSP and Compustat data. The eligible universe includes ordinary common US stocks of all capitalizations traded on NYSE, NASDAQ, and NYSE MKT. We identify a company with and without foreign sales exposure using Compustat’s annual geographic segment data. Value-weighted portfolios are formed on eligible stocks with and without foreign sales. Portfolios are rebalanced annually in January based on the annual geographic segment data. S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. MSCI data © MSCI 2024, all rights reserved.

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About the Author Douglas Finley, MS, CPWA, CFP, AEP, CDFA

Douglas Finley, MS, CFP, AEP, CDFA founded Finley Wealth Advisors in February of 2006, as a Fiduciary Fee-Only Registered Investment Advisor, with the goal of creating a firm that eliminated the conflicts of interest inherent in the financial planner – advisor/client relationship. The firm specializes in wealth management for the middle-class millionaire.

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