Choose carefully when diversifying your portfolio.
A constant dilemma in the world of wealth management is whether it’s wise to stick with the security of U.S. stocks or venture into the international marketplace in search of potential opportunities. This seems especially relevant now, when tough talk on tariffs threatens to roil the seas of international trade and usher in unintended consequences.
We at Coral Gables Trust Company have always preached that diversifying one’s portfolio — both geographically, between companies, and across investment vehicles — is the wisest move and the surest path to achieving your goals.
But when, how much, and where to diversify? The following are some things to consider. The international space has been hard over the past three or four years. We in the U.S. got our act together quickly after the 2008 financial crisis. We jumped into recovery mode right away, whereas the international markets were not as swift to respond.
There is opportunity in the European market, but investors must be patient. The U.S. is expensive relative to foreign markets, and overseas investments could be a better deal over the next five years. But the European zone is cheap for a reason. They’ve had a lot of bad news: Brexit and the Greek debt crisis are still lingering issues with no end in sight.
The U.S. is trading at a premium. We in the U.S. have better job numbers, and the Trump administration has unleashed a massive economic stimulus, comprising of a robust spending program and a large tax cut. Europe and Japan are three to four years behind us, and emerging markets are probably similar in their cycle, so it’s been challenging. But here’s the caveat: this cycle is nine years old, and no one knows what’s going to happen next.
The data are getting better: 2017 was a very strong year for all markets. Emerging markets were up 37 percent, and Europe up 25 percent. The U.S. market, with a 21 percent market return, underperformed for the first time in several years. But all the markets had synchronized growth.
In 2018, we seem to have broken away from the pack, from the rest of the world. But it’s not known how talk of tariffs is going to affect us, or the international markets. Everyone imports from and exports to everyone else. Will there be a pause or an interruption? No one knows; it’s impossible to pin down.
The Trump administration seems to be a little more friendly to the European Union, but negotiations with China are not going well. Right now, investors don’t seem to be concerned with the tough talk and harsh rhetoric about tariffs, possibly because they assume it’s all a negotiating tactic that does no real damage. But they could lose patience and run for the exits. It still wouldn’t affect the basic underpinning of the economy, but it would be a strong influence on the markets.
The rule we at Coral Gables Trust Company generally recommend to get diversity in your portfolio is to have 20 to 25 percent invested in the international markets, with 20 percent of that in emerging markets. When investing in emerging markets, don’t be country-specific, but instead approach it as a broad base.
And if you want to keep your investments in the U.S., there’s still something to remember. Just because a company is based here doesn’t mean its revenues and earnings are created here. Many American companies do business around the world, which means they are affected by the same pressures that drive the global marketplace.