August 2017 - Globalization: The Investor's Friend

The term “globalization” can stir emotions. Free international trade and the free flow of labor and capital across borders are increasingly in the news, and there is no shortage of opinion regarding appropriate policy.
Our parent organization, the American Institute for Economic Research (AIER), has generally viewed restrictions on trade and on capital and labor mobility with skepticism. Here at AIS, our focus is on capital markets. Individual investors should embrace the free flow of capital across borders. The ability to invest internationally expands the “opportunity set” of investable assets and therefore improves one’s ability to balance risk and return optimally.
Empirical evidence suggests that investors throughout the world fail to take full advantage of this opportunity. Instead they demonstrate a “home bias”. This is depicted in the table (following page), which presents at this aspect of investor behavior within five developed nations. The table compares each country’s proportional weight in the global stock market with the way investors in those countries collectively allocate their equity investments.
For example, at the end of 2014, Japanese equities accounted for 7.2 percent of the global equity market. Japanese investors, however, in aggregate held about 55.2 percent of their equities in Japan. Canadian investors’ home bias is even more extreme, and leaves them heavily concentrated not only in the economy of North America, but also in a highly cyclical sector (natural resources). Our approach to investing rests on an assumption that investors ultimately act rationally in their own best interest. It would appear, however, that when comes to investing globally investors fail to take full advantage of global equity markets and the enhanced diversification they offer.

 

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Also In This Issue:
Dissecting the Four Percent Rule
A Reader Inquires
Cybersecurity and Our Fiduciary Responsibilities
Cash Equivalent Assets:  Market Risk versus Invlation Risk
The High Yield Dow Investment Strategy
Recent Market Statistics
The Dow Jones Industrials Ranked by Yield
Recommended Investment Vehicles



 

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