Why Should You Diversify Internationally?

Given how poorly international markets have performed relative to U.S. markets during the last 6 years, some investors may be wondering about the benefits of investing internationally.  The simple answer is that different countries perform well at different times, and it reduces your risk and increases your long term returns when you’re broadly diversified across all of the world markets.

While it’s very tempting to look at recent past performance for insight into the future performance of a market, the recent past simply doesn’t tell us a thing about what will happen during the next few years.  In addition, the short-term is very difficult, if not impossible, to make predictions about.  So when it comes to making a decision about how much of your stock allocation should be in international stocks, I feel that broad diversification is the key to managing risk.  At Sparrow Wealth Management, we generally recommend a 50/50 split between U.S. and international stocks, which is consistent with how capital is currently deployed across the world equity markets.

For a deeper understanding of why international diversification is so important to your investment success, please read the following white paper that Dimensional Fund Advisors (DFA) just released.