- Investors often allocate the equity portion of their portfolios to domestic stocks, but unpredictable behavior and uncertain outcomes make it difficult to predict asset class performance.
- Balancing risk exposures across the globe may reduce risk without reducing return — that’s why our strategies invest in global equities.
Investors spend a great deal of time thinking about the future, but know very little about what will actually happen moving forward. That’s precisely why diversification is important. When we don’t know which asset will perform best over any given period, we can increase our chances of investing success by spreading portfolio risk across as many different assets and exposures as possible. This balancing of exposures allows for lower potential risk at any given level of expected return, increasing our confidence in achieving investment objectives (including both generating attractive returns and reducing the odds of significant losses) over any time horizon.
International Equities: A Tool to Balance Risk
Meaningful diversification benefits can be achieved by spreading a portfolio’s equity holdings across the globe rather than concentrating in a single country. Even if we think that domestic equities will outperform international equities over a given horizon, it’s possible that expectation will turn out to be wrong. We believe this uncertainty creates a permanent role for international equities in our portfolios with equity exposure at all times. There is always a chance that U.S. equities will underperform (as seen in Exhibit 1; download the commentary to view), and timing the cycle of outperformance and underperformance is difficult. Few investors would think that a portfolio that held only one stock, one industry, or even one sector was sufficiently diversified. Why would a portfolio holding only one country be any different?
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This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice.
Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company (SEI).
There are risks involved with investing, including loss of principal. Diversification does not ensure a profit or guarantee against a loss. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading
Past performance does not guarantee future results. Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.
Certain economic and market information contained herein has been obtained from published sources prepared by other parties, which in certain cases have not been updated through the date hereof. While such sources are believed to be reliable, neither SEI nor its subsidiaries assumes any responsibility for the accuracy or completeness of such information and such information has not been independently verified by SEI.