Volatility

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Volatility

The value of the stock market goes up and down, meaning that those invested in stocks and funds gain and lose money over time without taking any action. This movement is a feature, not a bug — the stock market is designed to continuously shift and change.

This up-and-down fluctuation in the value of the market, and of individual stocks and funds within the market, is called volatility.

What Is Volatility?

Volatility is a measure of how much the price of a stock or the value of the market changes over a specific period. That is to say, it’s an indication of how big, erratic, and rapid the up-and-down swings are.

The statistical measure typically used to assess volatility is standard deviation, which indicates how far the highs and lows stray from the average price. A stock or fund whose value is cratering and/or skyrocketing is very volatile, while one that shifts only a little does not have much volatility.

Volatility is a term that has negative connotations; many people use it to indicate a downward swing or crash in the market. However, volatility makes no judgement. The concept also includes upswings, which can help investors make money.

The idea to take away is that the greater the volatility, the riskier the investment. More than anything, volatility is an indication of short-term uncertainty.

How To Assess Volatility

You can assess the volatility of an individual stock or fund by looking at a metric called beta, which measures its historical volatility in relation to the S&P 500 index. If the beta is greater than one, the stock or fund has historically been more volatile than the S&P 500. A beta less than one indicates that the stock or fund has historically been more stable than the S&P 500. And a negative beta — an unusual occurrence — shows that the stock or fund has typically moved opposite the S&P 500.

You can assess the market as a whole by looking at the Chicago Board Options Exchange Volatility Index (VIX), which measures how much volatility is expected in the market in the next 30 days. The specific number the VIX lands on doesn’t really matter; its movement is more significant — if the VIX jumps upward, that usually means that a lot of volatility is on the way. This is why its other names are “Fear Gauge” and “Fear Index.”

Implied Volatility vs. Historical Volatility

Traders might look at two different types of volatility when judging what is likely to happen. Implied (or projected) volatility is a prediction of how volatile the market will be over a certain period. This metric is calculated using the prices of options. Since this is a prediction, it isn’t set in stone; the market may move differently than an assessment of implied volatility suggests it will.

Historical (or statistical or realized) volatility is a measure of how volatile a stock has been in the past during a particular period. It usually measures volatility by looking at the change in the closing price from one date to another, usually 10 to 180 trading days apart.

How Much Market Volatility Is Normal?

It is common and expected for markets to be volatile on a regular basis. During any given year, investors typically expect returns to deviate some 15% from average. Periodically — say once every five years — you’re likely to face more volatility, perhaps around 30%.

The amount of volatility that’s normal in a market is related to the general trend of the market at that time. The market can be either “bullish” (trending upward) or “bearish” (trending downward). Bullish markets are typically fairly stable, while bearish markets often have high volatility, with unpredictable swings that end up moving the market downward.

How to Handle Market Volatility

To be a savvy investor, you must learn to be comfortable with volatility. A cardinal rule of investing is to resist selling a stock or fund as soon as the price plunges. In fact, that old saying “buy low, sell high” should be your guiding principle — when the price takes a hit, it’s a better time to invest than to sell.

Historically when the market falls a lot, it comes back stronger — generating large gains once it recovers. Knowing this can help you avoid the mistake of selling when you shouldn’t. Also keep the following advice in mind:

  • Stick to a long-term plan: If you need the funds you’re investing in the near term, then you shouldn’t be in the market in the first place. The stock market is best left to those who can let their money weather the volatility and see eventual gains over years of investing.
  • Buy low: Purchasing stocks and funds that have had a strong track record during downturns is like buying good products at a discount. If you do so with the long term in mind, you may well eventually see a large return from the decision.
  • Keep some liquidity in your finances: You can remain sanguine about market volatility if you don’t need to pull your money out right away. You should have enough cash on hand in an emergency fund or other savings account so that you can safely leave your portfolio alone, even when prices are dipping downwards.
  • Rebalance your portfolio: Since volatility can result in changes to the relative values of the investments in your portfolio, it’s a good idea to rebalance periodically to make sure your asset allocation remains where you want it.
  • Get out of the market if you’re about to retire: Investors who are close to retirement will find too much risk in the naturally volatile stock market. They should put up to two years’ living expenses in non-market assets such as bonds, cash, home equity lines of credit, and cash values in life insurance.

How ETFs and Mutual Funds Can Protect You Against Volatility

One way to volatility-proof your investments is to choose some well-diversified ETFs or mutual funds, which can offer some downside protection and reduce your risk. Since these funds bundle multiple stocks — sometimes as many as 1,000 — they are likely to be somewhat insulated from the risk presented by volatility.

While both ETFs and mutual funds can help diversify your portfolio and reduce your risk, ETFs may be a better option for responding to volatility because of the speed of transaction they enable. It can take several days to make changes to a traditional mutual fund, while ETFs are traded like stocks and can transact much more quickly. This means you can take advantage of dips in the market by quickly investing more in your ETFs, or, if you’re so inclined, sell your shares quickly at a high point.

How Volatility Can Benefit Investors

While some investors may think they can use volatility to their advantage by waiting for stocks and funds to dip down before buying, then immediately selling at the next high point, it has proven difficult for such active management to beat the returns of a well-balanced mutual fund or ETF that tracks the market. Many investors therefore swear by a buy-and-hold strategy, which requires keeping investments long term so they rise gradually with the market.

Using a buy-and-hold strategy allows investors to double down on their investments in solid companies or ETFs when the market is at a low point due to volatility, setting themselves up for larger cumulative gains over time.

Those who do wish to use volatility to their advantage in a more active way have the potential to make big profits fast. However, you need to be very comfortable with risk and use some strategies to mitigate it. When investing during a volatile market with the intention of trading in the near term to make a profit, consider your position size and stop-loss placement. Doing smaller trades and using a wider stop-loss than usual can reduce your risk. Another good strategy is to seek out trending stocks or funds that have shown strong growth but haven’t accelerated faster than the broader market..

Takeaways About Volatility

  • Volatility is how much the price of a stock or fund moves away from the average price, either up or down or both, in a given period of time.
  • Volatility is a normal part of the stock market; investors can expect 15% movement away from the market’s average in any given year, and will see greater fluctuation periodically.
  • Investors can weather volatility by sticking to a long-term plan, using a buy-and-hold strategy, and maintaining enough liquidity in their finances.
  • Investors can benefit from volatility by buying on downswings and then holding onto their assets over time as the market gradually climbs.
  • Those who want to use volatility to make big gains need to be very comfortable with risk and use strategies to reduce it.

Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Try it for yourself today. 

This blog is sponsored by Magnifi. The information and data are as of the publish date unless otherwise noted and subject to change. This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. [As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer, custodian, investment advice or related investment services.]


International Bonds

With the globalization of business and investing, companies around the world can tap investors outside their domestic markets for financing. One way of doing so is by issuing international bonds.

Investors are eager to buy these bonds to diversify their portfolios with international exposure, allowing them to smooth out their potential risk from economic ups and downs at home.

What Is an International Bond?

An international bond is a bond issued by an entity that is not domiciled in the same country as the investor. For example, a U.S. investor may buy a bond issued by a German company in Euros. For the Germany company this is a domestic bond, and for the U.S. investor, it is an international bond. These bonds are usually corporate bonds and are commonly found in U.S. mutual funds.

As with all bonds, international bonds pay interest at regular intervals and pay the bondholder the principal amount at maturity.

Why Invest in International Bonds?

Investors benefit from portfolio diversification by adding international bonds to their portfolios. International bonds provide exposure to other countries and their economic conditions. A U.S. investor whose portfolio includes bonds issued in Asian countries will benefit when Asian economies are doing well, even if the U.S. economy is suffering.

A portfolio that includes international bonds from a range of countries and regions will be relatively insulated against economic downturns in any particular part of the globe.

Types of International Bonds

Domestic Bonds
A company or government entity in a given country can issue, underwrite, and trade these bonds to foreign investors. The bonds use the currency and follow the regulations of the issuer’s country. For example, a bond issued by a German company in Euros and subject to EU regulations is a domestic bond. When a U.S. investor buys the bond, it is an international bond for that investor.

Eurobonds
A company or government entity issues a Eurobond in the currency of one country — not the issuer’s domestic currency — and trades it in another country that is not the issuer’s country. As per the name, the issuers of these bonds are usually European companies, though the bonds can trade in non-European countries. For example, a bond issued by a German company in Japan denominated in U.S. dollars is a Eurobond, or more specifically a Eurodollar bond, indicating the type of currency.

Foreign Bonds
People sometimes use the terms international bonds and foreign bonds interchangeably, but these are different. Foreign bonds are issued in a domestic market in domestic currency by a foreign issuer, following domestic regulations. For example, a bond issued by a German company in the U.S. and valued in U.S. dollars is a foreign bond. There are a range of silly names for foreign bonds to indicate the country and currency in which they are issued, for example a Samurai bond is issued in Japanese yen, a Yankee bond is issued in U.S. dollars, and a Bulldog bond is issued in British pounds sterling.

Risk in International Bonds

While international bonds help investors diversify their portfolios, they can complicate things simultaneously. The bonds may be subject to different regulations and taxation requirements than the investor is used to.

And as they are denominated and pay interest in a foreign currency, their value fluctuates with the economic conditions in the issuer’s country, and with the exchange rates between the investor’s and issuer’s countries. That means that these bonds are subject to currency risk, or exchange-rate risk.

Currency risk is the potential for change in the relative price of two currencies in relation to each other. These fluctuations can introduce instability in profits and losses, requiring various strategies to hedge risk.

How to Invest in International Bonds

There are two ways to invest in international bonds: You can buy the bonds directly or you can invest in a mutual fund or exchange-traded fund (ETF) that focuses on international bonds.

The latter option can be a good idea for all but sophisticated investors, as it can be complicated to directly buy bonds issued in another country. Mutual funds and ETFs also have the benefit of lots of diversification, as there are many bonds bundled into each fund.

One thing to keep in mind when investing is that currency exchange is unpredictable, so you shouldn’t make the mistake of thinking you can guess how things will go. Don’t buy into a foreign bond fund to beat the market; only do it to gain more diversification. It’s wise to keep your allocation in those funds to a quarter at most.

Fees are another thing to think about. If you buy a mutual fund or ETF, you’ll need to pay a management fee, or expense ratio. Look for a fund with an expense ratio below — ideally well below — 0.50%. You may be able to invest in bond funds and ETFs without fees using a commission-free investing app like M1 Finance, Fidelity, TD Ameritrade, Robinhood, or Vanguard.

Key Takeaways About International Bonds

International bonds are a good way for investors to diversify their portfolios with foreign assets and gain exposure to international markets.
International bonds come with high currency risk, which means that changes in the relative values of the currency in which the bond is issued and the investor’s currency could make for some unpleasant surprises.
The simplest way to invest in international bonds is via bond funds for ETFs that focus on international bonds. These funds allow investors to diversify their portfolios greatly and usually have low or no fees.

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This blog is sponsored by Magnifi. The information and data are as of the publish date unless otherwise noted and subject to change. This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. [As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer, custodian, investment advice or related investment services.]


Equity Income

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Investing in the stock market can be a risky endeavor. But many investors are looking for returns higher than they can find from the safest bets like government bonds. Those who are interested in getting a steady stream of income from their investments while keeping their risk relatively low will want to consider focusing on gaining equity income.

What Is Equity Income?

Equity income is income that investors earn via stock dividends, which is money that companies pay to shareholders out of their net profits to reward them for investing. You can get dividends either by owning shares of stocks or by owning shares of mutual funds or exchange-traded funds (ETFs) that invest in dividend-paying companies.

Equity income is appealing to conservative investors who are focused on generating long-term income. The large, established companies that pay dividends often have an annual target for a dividend payout rate that they incorporate into their financial planning. This means that investors can count on this income, at least more than they can count on other returns from owning stocks.

That being said, it’s important to know that companies do not have a legal obligation to pay dividends; they can reduce or end them whenever they want for any reason. Dividends are likely to shrink if the company’s profits shrink. But the reverse can be true too — a banner year for the company may result in higher dividends.

‘Income’ Stock vs. ‘Growth’ Stock

Stocks that have a record of paying a regular dividend are knowns as “income stocks.”
These stocks contrast to “growth” stocks, which tend to have a higher level of risk and expectation of return.

The companies that pay income stocks tend to be large, well run, and more stable than the larger equity market. An appealing income stock will be one with less volatility than the market as a whole, but with better returns than are available from other income investments, such as U.S. Treasury bonds.

True to its name, a growth stock focuses more on growth than stability; it’s a share in a company that is on track to grow faster than the market but probably will not be paying any dividends to shareholders. These types of companies tend to reinvest their profits into the business to spur more growth, which might mean high returns but also leads to more potential volatility.

What Is an Equity Income Fund?

An equity income fund is a type of mutual fund that focuses investment on a range of dividend-paying stocks. These funds may target their investments in various ways: by a benchmark dividend yield, a geographical focus, or target companies’ credit-ratings.

As with other types of mutual funds, equity income funds give investors the opportunity to diversify, since they are able to buy an interest in multiple companies via purchasing even a single share of the fund. This provides less exposure to risk than buying individual stocks. Since income stocks are already on the lower end of the risk spectrum, buying equity income funds is a particularly good way to reduce risk.

What Are Forward and Trailing Dividend Yields?

An equity stock’s or fund’s dividend yield is the amount of equity income shareholders receive. Each one has a forward dividend yield and trailing dividend yield, which can help investors assess the payout as a fraction of the price.

A forward dividend yield is an estimate of the dividend yield for the current year, derived from available information. The trailing dividend yield is the amount of the dividend payout during the previous year, based on share price.

Benefits of Equity Income Investing

There are several good reasons to invest in equity stocks and funds.

Long-term income
Investors often seek to hold income stocks for the long term. Those who favor these types of investments prioritize capital appreciation and income instead of rapid growth. One way investors can increase their long-term income from equity stocks is through dividend reinvestment, which allows an investor to reinvest dividends in fractional shares of the stock or fund.

Lower risk than growth stocks
Dividend-paying stocks are seen to be generally less risky than stocks that don’t pay dividends. They carry more risk than other common income investments, such as bonds and cash, but they are less risky than other stocks and mutual funds, particularly growth stocks.

Relatively high potential returns
Compared to other income investments like bonds or money market funds, equity income stocks and funds are apt to provide higher returns. While they may not generate the high returns of growth stocks, they will be a more lucrative investment than a cash account.

To provide an idea of returns, these were the top five dividend-paying stocks on the Russell 1000 stock market index as of June 1, 2021:

  • OneMain Holdings Inc. (OMF) (forward dividend yield of 13.06%)
  • Annaly Capital Management Inc. (NLY) (forward dividend yield of 9.69%)
  • AGNC Investment Corp. (AGNC) (forward dividend yield of 8.03%)
  • New Residential Investment Corp. (NRZ) (forward dividend yield of 7.46%)
  • Equitrans Midstream Corp. (ETRN) (forward dividend yield of 7.35%)

FAQs about Equity Investing

Q: Who should use an equity income strategy?
A: Investors with relatively long-term time horizons for their investing should consider this strategy. Those who need cash-generating investments for major needs like funding retirement can particularly benefit from receiving dividends.

Q: Which kind of stocks are the best fit for an equity income portfolio?
A: An equity income portfolio should focus on domestic, large-cap, and high-profile stocks — companies like Apple, Microsoft, Johnson & Johnson, and Verizon, for example. Add in some mid-size companies and international large cap stocks and you’ll end up with a diversified mix. Try to avoid stocks from companies that have cut their dividend in the past.

Q: What would make you want to sell a stock?
A: Investors should look for dividend yields that are as high as possible. It is a good idea to sell when the price of a dividend stock appreciates faster than the growth of the dividend, meaning that the dividend effectively yields less over time. It’s also smart to sell stocks of companies that are paying out a large percentage of earnings in dividends.

4 Ideas to Remember About Equity Income

  • Equity income is a good way of securing long-term income, and reinvesting dividends can make a big difference in your overall returns over time.
  • Equity income investing focuses on achieving relatively low risk and relatively high return — a good middle ground between risky growth stocks and extremely safe but less lucrative income investments like bonds.
  • Income stocks, which pay dividends, are usually shares of large, established companies.
  • Investing in equity funds allows investors to diversify their holdings while keeping risk relatively low.

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This blog is sponsored by Magnifi. The information and data are as of the publish date unless otherwise noted and subject to change. This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. [As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer, custodian, investment advice or related investment services.]


Active ETFs

An Exchange Traded Fund (ETF) is an investment vehicle that bundles a diversified portfolio of stocks and bonds, with shares sold on the stock exchange. 

While ETFs started as passive investment vehicles, there are many that are now actively managed — overseen by fund managers who choose stocks and/or bonds in an effort to achieve above-market returns. These managed funds are called actively managed ETFs or active ETFs.

How Do ETFs Work?

An ETF functions like a cross between a stock and a mutual fund. ETFs are traded on an exchange like a stock. Yet these funds are comprised of shares of many stocks and bonds, like a mutual fund. As such, an ETF is a low-cost and tax-efficient option to invest in a variety of asset classes and investment strategies. 

ETFs tend to have lower annual expenses than mutual funds, but due to the fact that they are traded like stocks, they come with higher transaction costs such as commissions, bid-ask spreads, and other fees. 

What Is an Active ETF?

Most ETFs are passively managed — they track an index such as the S&P 500 or the Nasdaq. But as ETFs have grown in popularity, more and more of them have become actively traded, meaning that the fund’s manager actively buys or sells stocks and/or bonds to try to beat the market and generate higher returns. 

Despite the growth of active ETFs, they are still quite a small part of the overall ETF market. There were more than 500 actively managed ETFs in the U.S. in 2021, which accounted for about $193 billion in assets under management. That may seem like a lot, but these comprise less than one-fifth of all U.S. ETFs and make up about 3.5% of the total dollar amount invested in ETFs. 

Why Are Active ETFs Surging? 

The market for ETFs has more than quadrupled in less than a decade, leaping from $1 trillion in 2010 to more than $4 trillion in 2019. In 2018 alone, institutions currently investing in ETFs bumped average allocations in these funds to 24.8% of total assets, a significant increase from 18.5% in 2017. This phenomenal growth is driven by enthusiasm among institutional investors: 78% of institutional investors prefer ETFs to other index vehicles, according to a 2019 study of ETFs by Greenwich Associates.

There are several catalysts behind this surge in active ETFs, including the following. 

No Minimum Costs

Active ETFs have a far lower barrier to entry than mutual funds, which is the other actively managed product people invest in. Actively managed ETFs do not require a minimum investment, unlike mutual funds, which typically demand an initial outlay that can run into the thousands of dollars. An investor can buy a single share or fraction of a share of an ETF, allowing them to add an actively managed investment to their portfolio for as little as $1. While it’s important to be alert to fees and commissions associated with ETFs, many brokerages now offer commission-free trading, which makes ETFs even more affordable and accessible.

Tax Advantages

ETFs are known for tax efficiency in contrast to traditional mutual funds. ETFs are often more tax-efficient because they are index funds, which have fairly low turnover and thus provide less chance to realize gains when stocks or bonds are sold. More importantly, ETFs have a particular structure that is even more central to their tax efficiency. Shares of ETFs are created and destroyed through in-kind transactions that take place between the fund’s sponsors and an organization called an authorized participant. Due to this set-up, ETFs don’t usually have to directly sell positions from their portfolios to meet redemptions and can in this way avoid taxable capital gains distributions.

Rapid Risk Management 

Volatility in world events and economic circumstances in the last few years has left traders with a taste for being able to easily and rapidly manage risk as things change. As investors seek to reposition their portfolios to address a variety of risks, ETFs are a good tool to actualize specific changes without undue hassle. Other characteristics of ETFs, such as execution speed, single-trade diversification, and liquidity, are also helpful in mitigating risk. 

Versatility 

Institutional investors continue applying ETFs to more and more portfolio functions. This is possible because these funds have phenomenal versatility and can be applied to a wide range of strategic and tactical goals. It helps their popularity that institutional investors tend to prefer ETFs for factor-based and other specialized exposures.

Downside Protection

Early in 2021, actively managed ETFs clocked in at $200 billion in combined assets under management. Investors continue to seek out high returns with robust downside protection in an economic environment that remains in turmoil. Active management can be a key to that downside protection, and active ETFs are an affordable and accessible option for investors. 

What Are Common Active ETF Applications? 

  1. Tactical adjustments: Strategically tweak a portfolio to increase or reduce exposure to certain styles, regions, or countries.
  2. Strategic allocation: Bolster a portfolio with a long-term strategic holding.
  3. Rebalancing: Reduce risk between rebalancing cycles.
  4. Portfolio management: Round out and balance strategic asset allocation.
  5. Global diversification: Get access to foreign markets.
  6. Cash flow management: Help maintain liquidity.
  7. Transition enablement: Enable smooth management transitions. 
  8. Risk reduction: Mitigate risk and hedge changes in allocation.

Pros and Cons of Active ETFs

Pros

  • Active ETFs do not have investment minimums, and thus have a low barrier to entry. 
  • Many brokerages offer commission-free trading, making ETFs affordable and accessible.

Cons

  • Active management does not necessarily translate to higher returns.
  • Active ETFs charge higher fees than passive ETFs regardless of performance.

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Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Try it for yourself today. 

This blog is sponsored by Magnifi. The information and data are as of the publish date unless otherwise noted and subject to change. This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. [As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer, custodian, investment advice or related investment services.]


Global Investing

Global Investing

U.S. investors tend to stay close to home, prioritizing domestic stocks and funds. But non-U.S. markets comprise 57% of global investment opportunities, which means that close to half of those opportunities exist beyond U.S. borders. Some of the world’s largest technology, energy, and financial companies are international, such as Samsung in South Korea, Mitsubishi in Japan, ING in the Netherlands, and Allianz in Germany.

What Is Global Investing?

For many investors in the U.S., going “global” means investing in European companies. But this is a limited — and limiting — view of global investing. There is plenty of energy in non-U.S. and non-European markets around the world, from Southeast Asia to South America to Africa and beyond. 

Global investing means taking all of the markets around the world into consideration and putting some of your investment dollars in stocks and funds outside of the U.S. and Europe. 

Global Fund vs. International Funds

In the world of investing, “global” and “international” are not interchangeable terms the way they are in other contexts. Global funds and international funds are distinct, with different rules, goals, and opportunities.  

Global funds are comprised of securities from around the world, including the investor’s home country. Global funds give investors the chance to diversify and reduce country-specific risk while still including their own country in their investment portfolio. 

International funds, on the other hand, contain securities from around the world with the exception of the investor’s home country. These funds are a way for investors who already have a robust domestic portfolio to diversify outside that sphere. 

Why Invest Globally?

Investing globally — and for U.S. investors, specifically beyond the U.S. and Europe — is an effective way to reduce risk in a portfolio and also opens up the door to investing in all sorts of opportunities that don’t exist in one’s home country. 

As we pull out of the acute phase of the coronavirus pandemic, the economies of emerging-market and developing economies are projected to grow faster than the United States. These countries are on track to be the largest contributors to global GDP by 2042, and by 2050 will account for almost 60% of the world economy.

Accordingly, developed and emerging markets are beating the S&P 500 so far this year, with China, South Korea, and Japan showing strongest growth. In fact, some analysts are predicting that foreign equities might outperform U.S. stocks as a whole in 2021.

The growth of global funds in particular is a huge opportunity for investors. PwC predicts that global assets under management will reach $145.4 trillion by 2025, almost double the $84.9 trillion that was under management in 2016.

Investors who overlook these opportunities are limiting their ability to diversify, which increases risk in their portfolios. Owning a globally diversified portfolio protects investors against seeing serious losses when stocks in one country suffer setbacks that aren’t felt elsewhere.

Overlooking global investments also causes investors to miss out on some phenomenal investment options. There are exciting things unfolding in business around the world — in Brazil and China and Eastern Europe, for example — and U.S. investors who aren’t tapped into global options will lose a chance to capitalize on that energy. 

How to Invest Globally

While global investments are unlikely to make up a majority of a U.S. investor’s portfolio, it’s a good idea to target a sizable chunk of assets to invest overseas. According to Christine Benz, Morningstar’s director of personal finance, professionally managed asset allocations typically target 25-33% of the portfolio in overseas investments. This can be a good benchmark for individual investors to look to. 

Investors can add global investments to their portfolios by buying stocks or exchange-traded funds (ETFs).

Stocks 

There are a number of ways to invest in foreign stocks. U.S. depositary banks issue American Depository Receipts (ADRs) that attest to a right to ownership of a share or fraction of stock of a foreign company that trades in U.S. markets. U.S. Investors usually find it more convenient to own the ADR instead of the share of foreign stock itself. Alternately, depositary banks in an international market, usually in Europe, issue Global Depository Receipts (GDRs) that attest to ownership of shares in a non-U.S. company. GDRs are available to institutional investors in and outside the U.S.

Some investors may find it advantageous to invest directly in the stocks or bonds of foreign entities, perhaps with an eye toward acquiring a decisive stake in a company. This is not a good strategy for the casual investor, as there are many complex factors involved in these transactions, such as tariffs and trade barriers.

Exchange-traded funds (ETFs) 

ETFs group many different stocks or bonds — sometimes thousands — into a single fund that is traded on the stock exchange like an individual stock. These funds can focus on global stocks and sometimes have a regional focus. Individual investors are not allowed to buy mutual funds that are based outside their home country, so investors should buy a fund based in their own country that includes global investments. 

4 Ideas to Remember About Global Investing

Global investing is a good strategy for those who want to reduce their risk, open themselves up to exciting new opportunities, and become more sophisticated in their investing approach. Here are four important ideas to remember when considering global investing:

  • U.S. investors should look beyond Europe to truly diversify their investing globally. Great opportunities exist in regions all over the world. 
  • Global investing allows you to diversify your money and mitigate your risk so that when stocks in a given country take a hit, your portfolio stays strong.
  • Being open to investing beyond the U.S. and Europe opens up many phenomenal investment opportunities that you may have not known existed. 
  • Global funds are a fast-growing and potentially lucrative investment opportunity.

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This blog is sponsored by Magnifi. The information and data are as of the publish date unless otherwise noted and subject to change. This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. [As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer, custodian, investment advice or related investment services.]


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