As savvy goal-based investors know, diversification is one of the keys to long-term portfolio success. We all know that it’s unwise to keep all our eggs in one basket, which is one reason investors often turn to alternative investments such as private equity real estate or venture capital to balance their portfolio and hedge the risk of more common investments such as stocks, bonds, and mutual funds. Yet there are more ways to think of diversification than simply the industry or type of fund you’re investing in.
Investing internationally is an excellent way to ensure that your portfolio will reap the rewards of being fully diversified on multiple levels. The data has proven many times that it’s important for people to invest in different asset classes and regions to maximize diversification and increase their portfolio’s odds of success.
Here are some of the ways your portfolio can benefit from international diversification:
Sophisticated investors who seek big potential upsides often seek out international investments—especially in emerging markets—which can be purchased at a discounted cost with measured risk. While the United States economy provides investors with numerous upsides, it remains relatively stable and mature, equating to limited growth potential. Emerging markets, on the other hand, are where all the growth is happening; investors simply can’t find these stocks in the U.S. economy.
Africa, for instance, is home to 10 of the fastest-growing cities in the world. In these locales, populations are growing, business is booming, and both domestic and international investors want a piece of the pie.
photo credit: en.rfi.fr
In 2010, South Africa was listed as one of the top emerging national economies alongside Brazil, Russia, India, and China, comprising the influential group known today as BRICS. Cape Town’s luxury real estate market was even recognized as the second-fastest growing on the planet. With businesses flocking to Cape Town, Johannesburg, and other high-growth South African regions, the spike in investor interest is unsurprising.
One of the main benefits of international diversification is that these investments often follow different market cycles, as their performance is tied to different geo-political factors. For instance, while political pessimism in the United States may negatively impact our country’s stock market, other countries’ investments can remain unaffected. Therefore, when our economy is down, international investments can help boost portfolio performance by equalizing at-home losses with international gains.
International diversification means more diversification in currency, which can reduce expected volatility and risk in the long term. In addition, when the exchange rate between the U.S. dollar and the currency of an international investment changes, it has the potential to increase your investment return. By investing in international real estate, you will generate cash flow in a different currency to maximize diversification. Plus, you’ll get a lot more bang for your (American) buck. For example, in early December 2018, $1 (USD) would equate to 14.35 South African rand (ZAR).
Photo Credit: pexels.com
Thanks to OppenheimerFunds, we know that 76% of the world’s companies valued over $1B in market cap live outside of the United States. With so many international companies making waves in both the local and global arena, it would be unwise to dismiss such a huge potential for investment growth in international markets. Plus, recent data suggests the U.S. economy will account for a smaller percentage of the world’s wealth in years to come.
photo credit: emagine.info
According to finance guru Paul A. Merriman, “U.S. multinationals don’t give [investors] much exposure to value, small-cap, small-cap value or emerging markets — every one of which can be a powerful return booster.” Therefore, if you think you have a hand in international investing simply because you have invested in U.S. multinational businesses, you’re wrong. International diversification requires investments specifically made within foreign markets.
International Man claims that “foreign real estate is the new Swiss bank account.” Although there are a number of considerations to be made when adding international investments to your portfolio, international diversification can be an excellent way to help you achieve your long-term goals. Foreign real estate is one of the best places to get started.
To learn more about how our South African real estate investments can complement your portfolio, please subscribe.