Home Bias Risk Can Be Diversified Away
As the United States is the world’s largest national economy with a GDP of 23 trillion, it is understandable that US investors think it is fine and dandy to hold all of their investments within the US and in US dollars. Overweighting investments in their home country is understandable, but a home bias isn’t optimal.
While the US stock market has been incredibly strong, despite recent reversals, by some definitions it qualifies as having the longest bull market in history. However, it hasn’t always been that way, and it’s unlikely to maintain that streak forever. It’s impossible to predict what will happen with the stock market going forward, but, historically, US stocks have also seen long periods of underperformance compared to international stocks.
Owning a home-biased portfolio can lead to suboptimal risk-adjusted returns. According to best practises in portfolio management, the volatility of an investment portfolio is reduced by adding international diversification to the overall wealth strategy. Global investment diversification helps to mitigate the risk of local downturns while capitalising on growth over the long term.
Considering that the world’s equity assets make up over 50% of invested assets versus the US’ 43%, it makes sense to include a good portion of diversified international assets in a well-designed portfolio to reduce the risk of overweighting one particular country.
What percentage of an American investor’s portfolio should be invested internationally? Some advisors will claim that 50% is fitting, while others suggest anywhere between 5 and 30%. Beginners may choose a smaller percentage, while others already comfortable with going global may choose up to 30% or more.
True international diversification usually means that a portfolio will never be the portfolio with the highest returns, but it will also generally be better equipped to handle local crises and downturns. Appropriately designed, an internationally-diversified portfolio not only helps to avoid the risk of local downturns but also to capitalise on global growth over the long term.
In the long term, a well-diversified, global portfolio can help avoid unnecessary risks.
Jurisdictional diversification is important, too
Holding some emerging market mutual funds at a local bank, even in other currencies, is not true international investment diversification. Going to another jurisdiction outside the United States, to other non-domestic financial institutions, holding other foreign investments, and other currencies is the real McCoy when it comes to effective risk diversification. Engaging a wealth manager with in-depth international experience and a global outlook with a different perspective than a local investment advisor leads to true and effective international portfolio diversification.
Christian Kamer, Managing Partner at Alpen Partners International in Switzerland, points out, “Future financial well-being shouldn’t be tied to just one country, one market, one currency, and one perspective.”
For the most part, local American wealth advisors understandably focus on their home markets, local financial institutions, and US dollar investments. However, to achieve greater resiliency for an overall portfolio through global diversification, an internationally-minded wealth manager will target different investments than a domestic advisor. Holding an investment portfolio in a strong bank outside the US banking system provides institutional risk diversification and greater flexibility. Currency diversification provides a hedge against a weakening US dollar. In today’s world of increasing volatility and unpredictable geopolitical developments, the prudent investor shouldn’t walk around blindfolded but should be prepared for bumps that may arise along their home-market roads.
Pierre Gabris, Founder and Managing Partner of Alpen Partners International confirms, “It is simply prudent to have a “Plan B” in place including holding some assets outside the US financial system.”
Where to go?
Grüezi and welcome to Switzerland!
With the turbulences of the past left behind, Switzerland remains one of the world’s leading and most competitive financial centres and the global leader for cross-border private wealth management, with a world share of around 25%, of which about half is from internationally-savvy investors abroad. Switzerland offers a first-class environment for technological innovation, while its regulatory system is recognised internationally as exemplary.
Both lucrative and innovative. Swiss banking successfully combines traditional strengths such as stability and universality of services with innovation in areas such as fintech and sustainable finance. Customers can count on a broad selection of high-quality financial services, the legal certainty, and stable conditions Switzerland offers, the expertise and sense of responsibility that the banks and wealth managers embody, as well as the quality of the advice and services they provide.
Switzerland can be a second home to your assets too.
The highest level of economic and political stability, neutrality, high-quality services and extensive expertise and experience is Switzerland’s claim to fame for its long-term success as a leading, innovative financial centre. Especially during times of crisis and increasing volatility, the world’s wealthy turn to Switzerland as a safe haven for their assets. Switzerland has been named one of the world’s most resilient countries, best able to handle the pandemic crisis and its aftermath. Despite the repercussions of the pandemic, Switzerland is expected to book a surplus at year’s end.
The Swiss traditions of reliability, continuity, and excellence with a high regard for privacy and discretion in an increasingly transparent world are qualities appreciated by astute international investors concerned about the preservation of their assets in the unpredictable future.
You can add the long-term strength of the Swiss franc to the equation. While other western countries are experiencing high inflation, Switzerland’s inflation rate is low in comparison at 3.4% and better maintains its purchasing power than the US dollar, for example.
In addition to being a home to a portion of your assets, Switzerland can also be a good choice for residency and there are ways and means to be able to do so for US citizens.
Switzerland: Perhaps the safest place for assets in an increasingly unsafe world.
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