Today I thought I would address a question that was asked via email. The question was on whether it is still a good idea to diversify internationally, given the troubles that Europe is having.
Remember that the two factors that decrease risk are diversification and time. Diversification should include spreading money across different asset classes (large stocks, small stocks, old stocks, young stocks, bonds, limited partnerships (in IRAs), real estate or REITs, and cash). It is also a good idea to diversify internationally since the US is not always the best place to invest.
The advantage that the US has generally had is security, a system of laws and contracts, and a government that was predictable. Security is less certain than it has been in the past, but is still very high compared to many other places. The security of contracts is somewhat less than it was before 2008 since the delegation of bond holders to subordinate status below other creditors in the GM bankruptcy and some of the pressure imposed mortgage lenders to change loan contracts has called the security of contracts into question. Government predictability is also less than it was, given the recent increase in the level of regulations, talk about CO2 taxes and trading, and uncertainty over tax rates and the national debt. Taken together, some caution is definitely warranted.
Internationally, there are issues in Europe with the Greek economic collapse looming, and other countries on the fence. China may also be facing a recession, as may some other countries. Still, most of the news about these countries is out on the table and the effects are largely factored into stock prices. Usually the time to buy is after the bad news comes out and people have had time to digest it.
I would probably always overweight in US stocks because I still feel that the US is one of the safest places (politically) in the world, and maybe partially out of a sense of loyalty. I would still have a portion of assets invested internationally, however, just to reduce the volatility.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.