Portfolio Globalization

This is the first in a series of five articles on investing in a global environment by guest authors Christopher L. Cox and Amy F. Williard, Managing Members of The MonitorGroup, LLC, in Rockville, Maryland.  Their firm specializes in financial planning and advisory services and works closely with AAMG and its staff.

Investment portfolio diversification is one of the most important principles to which an investor should adhere.  We hear this statement often from financial industry experts. The guidelines for this diversification usually allow for a portfolio to have between 5 and 10% invested in international companies. At what point are we driving our portfolio’s direction while looking in the rearview mirror? Isn’t it time to change these guidelines? There is a definite need to increase global investing allocations.  It is time to break the rules.

When considering who has the biggest economic engine for growth globally, the United States has dominated this category for decades.  It looks like the U.S.’s contribution to global economic growth will continue for decades as well, although we are sharing more and more of the pie. We are seeing globalization change the composition of global GDP (Gross Domestic Product) through trade integration, financial integration, and global production networks.  Think about it: Who makes the shoes you are wearing?  And the car you are driving? As the rest of the world has grown their economies, the U.S. has also, but at a slower pace.  The U.S. now constitutes 24% of the World’s GDP or $12,487.1 trillion dollars. (Source: U.S. Bureau of Econ. Analysis)  If 76% of the World’s growth is coming from other countries, our portfolio allocations should capture some of that growth.

Today, financial markets are more evolved and as such, making an allocation to increase global exposure is more important. In the past, it didn’t matter if a company was operating on a global or purely international level. Your portfolio would include this company and you would be following the guidelines. Today, it does make a difference. Let us be clear. Global and International Investing designate two separate activities.

In the coming weeks, we will define Global, International, and Emerging Markets Investing. There is an evolution today in the World’s financial markets. Is there an evolution in your portfolio?

Christopher L. Cox
Amy F. Williard

July 26, 2006