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Over the course of my 30-year career in financial markets, including a stint as chairman of the S&P US Index Committee, I have been through some serious ups and downs. Yet no historical parallel seems to fit the current moment. The United States may effectively be rewriting its geopolitical role after 80 years of global leadership. We do not know the full contours of its reimagined role or how broadly its ripple effects will reach.
World markets could be in the throes of a generational paradigm shift that eventually sees the U.S. playing a diminished role in trade and global finance. Alternatively, perhaps geopolitical negotiations will reorder trade and capital balances in a more benign way. It’s difficult to say at this juncture. Trade and economic dynamics could lead to increasing cold or even hot wars, or leading global powers could embark on a less confrontational path of competitive cooperation. Whatever comes to pass, the following broad principles should serve you well and may be particularly timely now.
1. Diversify stock portfolios globally
As always, we do not know the future. Yet this moment rings of deep change, where well-recognized patterns of economic, trade and market behavior may not continue to be guideposts we once confidently knew. In an era of realignment on so many levels, owning a little bit of all the world’s investable stock markets offers multiple streams of potential returns including international economic growth and foreign currency exposure. Individual countries and regions may de-couple at the margin, while new bilateral and multilateral alliances form.
Global exposure gets you out of the game of picking winners and losers while providing local foreign stock market and currency returns. This should enhance diversification as individual country correlations evolve.
Prevailing attitudes about global diversification wax and wane, largely depending on USD performance of international stocks. The years leading up to and through 2024 saw strong U.S. outperformance relative to other developed markets, and many investors were happy to limit stock investments to the U.S., particularly because large publicly traded U.S. companies are global organizations offering international revenue exposure.
While it may seem unnecessary — or even unwise — in moments of U.S. stock market euphoria like late 2024, I believe global equity diversification is an integral part of sound long-term strategic asset allocation. The range of global market valuations — and therefore forward-looking expected returns — is one compelling reason why including international markets makes sense. Another is the simple fact that, by omitting foreign domiciled stocks, investors miss a significant portion of the global opportunity set. U.S.-domiciled companies account for only a little more than one-third of the total number in the world.
Globally diversified investors can be patient. Valuation differentials may take a long time to mean-revert, but while you wait, diversification can be its own reward. As some markets de-couple, globally diversified portfolios may see an enhancement in risk-adjusted returns.
2. Be vigilant about how clients are positioned for unexpected inflation
While stocks have historically delivered sizable real returns, they are generally not a very good short-term inflation hedge. It takes time for companies to adjust to unexpected inflation shocks, just as it takes time for consumers to adjust through combinations of substitution, deprivation, and real income growth.
Given the confluence of inflationary government policies and worldviews stoking anti-competitive forces, it seems likely we may experience higher average inflation in coming years than in the past. Investors should always be attuned to inflation risk, but it seems pronounced in this moment. How should your clients adjust behavior and investments?
People of all ages should pay close attention to their spending. Apps like Quicken Simplifi may help them stay organized. Those who are employed should stay attuned to opportunities for income growth and knowing their value in the labor market. They should take advantage of every opportunity to save and invest.
Clients in retirement should have a realistic spending plan and adjust their portfolio as needed to make sure necessary spending is securely funded. Help them incorporate investments that provide built-in inflation protection like TIPS and I-Bonds. If they annuitize some of their liquid assets, find a policy with an annual increase rider. These are not typically indexed to CPI like TIPS and I-Bonds, but they do protect buying power to the extent of the annual increase. A modest allocation to commodities or hard assets like rental property may be considered if consistent with risk references and lifestyles.
In summary, including international stocks and direct inflation protection to investment programs will diversify income and return streams. These steps should keep clients progressing toward their goals. They will never be exclusively invested in the best-performing asset or market, but they may enjoy a smoother ride on the journey to funding their lives’ goals, aspirations, and purpose.
Philip Murphy is Founder and Principal Advisor at IndiePlanTM, an advice-only investment and financial planning firm. He is a CFP® Practitioner and CFA® Charterholder. Murphy is a former Head of Index Governance and Chairman of the US Index Committee at S&P Dow Jones Indices, where he oversaw major benchmarks like the S&P 500®.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
