It’s been a dazzling decade for US stocks, and folks have loaded up on them big-time. But even with the US market’s standout reputation and all its fundamental reasons for being the investing world’s darling, the fact is that today’s winners may not be tomorrow’s. And with the US market’s ultra-rich valuations and the quickly shifting macroeconomic backdrop, diversifying isn’t just smart – it’s a must.
By spreading your investments across different assets that thrive under different conditions, you can avoid risking everything on a single outcome. What’s more, you can improve your portfolio’s resilience, while still protecting your return potential, making it stronger in “risk-adjusted” terms.
Of course, diversifying away from the US is no easy task: America’s economic dominance and its role as a major importer and capital provider tend to shape global market trends. And that makes it tough to find investments that dance to an entirely different beat.
Luckily, Bridgewater has done your homework for you. The hedge fund giant (founded by investing legend Ray Dalio) calculated a “diversification” score for different economies, taking into account their correlation to US assets and economic conditions for the past quarter-century.
The team found that China, Japan, Brazil, India, and some Eastern European economies are good at doing their own thing – and not mirroring the US’s every move.
Meanwhile, the UK, Europe, Canada, Australia, Mexico, and Taiwan turned out to be a bit too in sync with America to offer that diversification spice your portfolio craves.
China, Japan, Brazil, and India are the most diversifying economies. Source: Bridgewater.
But Bridgewater didn’t stop at diversification scores. To avoid investing in diversifiers with bad fundamentals, the team also made sure asset prices from those countries have room to rise – weighing not just their valuations, but also how much economic pressure they’re facing.
China, Japan, and Brazil are good diversifiers – and they rank among the best-looking global plays out there. Source: Bridgewater.
And the good news is, three of those top picks for mixing things up – China, Japan, and Brazil – are also among the best-looking global plays right now (although Bridgewater does warn that China’s challenging geopolitical and regulatory environment means it can’t absorb much capital, making it a bit more risky).
Meanwhile, assets in the UK, South Africa, and the Czech Republic, also popped up on the best-looking global list, but those countries’ assets don’t provide the same diversification bang for your buck.
As for India, while it did rank as a good diversifier in a US-heavy portfolio, its assets didn’t pass the attractiveness test.
