Global investing

What Is Global Investing?

Global investing refers to the practice of buying assets from markets around the world, rather than limiting investments to one's home country. This approach falls under the broader financial category of portfolio theory, aiming to enhance returns and reduce risk through geographical diversification. Global investing allows individuals and institutions to tap into growth opportunities in various economies and potentially mitigate the impact of downturns in any single market.

History and Origin

The concept of investing across borders has existed for centuries, with early examples including merchants financing ventures in distant lands. However, modern global investing, characterized by significant cross-border capital flows and integrated financial markets, gained substantial momentum in the late 20th century. A key driver was the dismantling of capital controls and the liberalization of financial markets in many countries, particularly from the 1980s onwards. This period saw a rapid advancement in financial globalization, aided by the development of new financial products and improved information flow. Remarks by former Federal Reserve Chairman Alan Greenspan in 2003 highlighted the significant progress of financial globalization and the increasing interconnectedness of global financial markets²¹. This trend has been described as a "second wave of globalization" that commenced after World War II, following an earlier period of integration that waned after World War I²⁰.

Key Takeaways

• Global investing involves diversifying investments across international markets to potentially improve returns and manage risk.
• It provides access to growth opportunities in diverse economies worldwide.
• Currency fluctuations, political instability, and differing regulatory environments are key considerations in global investing.
• Investors can engage in global investing through various instruments, including foreign stocks, bonds, and global mutual funds.
• Despite its benefits, global investing comes with unique challenges, such as information asymmetry and varying market liquidity.

Interpreting Global Investing

Interpreting global investing involves understanding its multifaceted impact on a portfolio's risk and return profile. By including assets from different countries and regions, an investor can reduce portfolio volatility because international markets often do not move in perfect lockstep with domestic markets¹⁸, ¹⁹. For instance, if the domestic market experiences a downturn, a globally diversified portfolio might be cushioned by positive performance in other parts of the world.

However, global investing also introduces new considerations. Investors must account for currency risk, as fluctuations in exchange rates can affect the value of foreign investments when converted back to the home currency. Additionally, understanding the macroeconomic factors and geopolitical risks specific to each country is crucial. Information available about foreign companies, including financial statements, may differ in nature, amount, and frequency from those required of domestic companies, and may not always be in English¹⁶, ¹⁷.

Hypothetical Example

Consider an investor, Alex, based in the United States, who traditionally invests only in U.S. stocks and bonds. Alex decides to embrace global investing to enhance diversification.

1. Initial Portfolio (Domestic Focus):

   • 60% U.S. Stocks (e.g., S&P 500 index fund)
   • 40% U.S. Bonds (e.g., U.S. Aggregate Bond index fund)

2. Transition to Global Investing: Alex allocates a portion of their U.S. equity exposure to international markets. They might choose to invest in a total international stock market index fund.

3. Revised Portfolio (Global Focus):

   • 35% U.S. Stocks
   • 25% International Stocks
   • 40% U.S. Bonds

In this revised portfolio, Alex now has exposure to economic growth and company performance beyond U.S. borders, potentially mitigating concentration risk associated with a purely domestic portfolio. If, for example, the U.S. economy faces a recession, strong performance in emerging markets could help stabilize Alex's overall returns. This approach aligns with principles of asset allocation that emphasize spreading risk across diverse assets.

Practical Applications

Global investing is a cornerstone of modern portfolio construction for various entities, from individual retail investors to large institutional funds.

• Retail Investors: Many retail investors gain global exposure through mutual funds or exchange-traded funds (ETFs) that specifically target international or global markets. These funds often hold a diversified basket of foreign stocks and bonds, simplifying the process for individual investors.
• Institutional Investors: Pension funds, endowments, and sovereign wealth funds, such as Norway's Government Pension Fund Global, actively engage in global investing to achieve broad exposure to global growth and diversify risk across markets, countries, and currencies¹⁵.
• Corporate Finance: Multinational corporations engage in foreign direct investment (FDI) by establishing or acquiring businesses in other countries, which is a direct form of global investing driven by strategic objectives like market expansion or access to resources. The U.S. Department of the Treasury also has regulations requiring notification or prohibition of certain U.S. investments in specific national security technologies and products in countries of concern¹⁴.
• Risk Management: Global investing is a key strategy in risk management as it can reduce overall portfolio volatility. The Securities and Exchange Commission (SEC) highlights diversification among foreign companies and markets as a chief reason for international investing¹³.

Limitations and Criticisms

While beneficial, global investing faces certain limitations and criticisms. One significant challenge is "home bias," where investors disproportionately allocate their portfolios to domestic assets, often due to familiarity or perceived lower risk¹¹, ¹². This can lead to missed diversification benefits from international markets¹⁰.

Another limitation is the potential for increased complexity and costs. Investing directly in foreign markets can involve higher transaction fees, different tax regulations, and less transparent reporting standards compared to domestic markets⁸, ⁹. Information about foreign companies may also be less accessible or not available in English⁶, ⁷. Furthermore, while global investing aims to diversify risk, extreme global events, such as widespread financial crises, can still impact all markets, reducing the effectiveness of diversification during such periods⁴, ⁵. The interconnectedness of global markets means that major economic shocks can quickly transmit across borders, diminishing the expected benefits of geographic diversification.

Global Investing vs. International Investing

While often used interchangeably, "global investing" and "international investing" have a subtle distinction in the context of investment terminology.

The key difference lies in the inclusion or exclusion of the investor's home country. A globally diversified portfolio aims for exposure to the entire global market capitalization, which inherently includes the domestic market. In contrast, an international investment strategy focuses explicitly on assets outside the investor's home country to gain foreign market exposure. Both strategies aim to harness the benefits of geographical diversification and access a wider array of investment opportunities, but global investing provides a more comprehensive, all-encompassing approach.

FAQs

What are the main benefits of global investing?

The primary benefits of global investing are enhanced diversification and access to a broader range of growth opportunities. By investing in different economies, you can potentially reduce overall portfolio risk and capture returns from markets that may be outperforming your home country.

What are the risks associated with global investing?

Key risks in global investing include currency risk, political instability, different regulatory environments, and varying accounting standards. There can also be less liquidity in certain foreign markets compared to developed domestic markets, and information may be less readily available², ³.

How can an individual investor participate in global investing?

Individual investors can engage in global investing through various avenues, most commonly via global or international mutual funds and exchange-traded funds (ETFs). These funds pool money from many investors to buy a diversified portfolio of foreign securities. Alternatively, investors can purchase American Depository Receipts (ADRs) or directly buy foreign stocks and bonds through a brokerage account, though this may involve higher costs and complexities¹.

Is global investing suitable for all investors?

Global investing is generally suitable for most long-term investors seeking to maximize diversification and capture worldwide growth. However, investors should understand the associated risks and consider their risk tolerance and financial goals. A sound investment strategy for global investing often involves a strategic allocation to international assets within a well-diversified portfolio.