Imagine a race with many runners on a warm sunny day. The U.S. runner is ahead of the pack and running away from the field. Many people see investing as just this kind of race. Since the great recession, the U.S. stock market has been ahead in the race and has pulled away from the world’s stock markets. This year, the United States pulled even farther ahead of the world’s stock markets, propelled by new corporate tax cuts.
To investors, global diversification may not seem to make sense in a year when the U.S. is pulling ahead of the pack. It’s confusing; academic studies and common sense tell us diversification is always healthy for a portfolio. But how can international diversification be healthy if it causes our portfolios to start lagging in the race? Two changes in perspective can help us see diversification in its proper context:
Investing is not a race
There is no finish line that the U.S. market will cross and finally be able to fall into a heap of exhaustion and claim victory. Investing is a lifelong journey. The goal of investing is to provide healthy income and principal growth over a very long period of time.
Tax cuts have boosted the U.S. stock market, but this is a one-time event. We cannot expect another tax cut in 2019 to spur the U.S. stock market on even more. Also, the trade war hurt most foreign stock markets over the last six months, while sparing the U.S. The U.S. has benefited from the trade war, but that lead is unlikely to continue. In addition, we believe a trade war hurts all nations in the long run, including the U.S.
Investing is a team sport, not an individual race
When you create a portfolio, you select team members who will come together as a cohesive unit. Yes, the U.S. has been pulling the rest of the team this year. However, there will come a time when the U.S. stock market takes a breather and we will need to rely on the other team players to carry the weight. That is the essence of diversification.
At RegentAtlantic, we have proactively assembled a team of investments that we believe will have different patterns of returns. When one investment is in a lull, we expect other investments on the team to take up the slack. However, like any experienced coach, we acknowledge that we cannot predict when each member of the portfolio team is going to shine. That is why we diversify.
The True Cost of Trade Wars and Tax Cuts
In the short-term, both the trade war and tax cuts were positive for U.S. stocks in 2018. However, we fear that both of these influences have been factored into the market already and may cause U.S. stocks to run out of steam in the long run.
Tariffs are taxes that increase the costs of imports. That, in turn, causes inflation. Inflation usually causes interest rates to increase. The Federal Reserve is already increasing interest rates, so adding inflation to the mix puts even more upward pressure on interest rates.
Higher interest rates increase the value of the U.S. dollar versus other currencies. When the dollar is strong, U.S. goods and services are more expensive in the global market. That makes the United States less competitive. It also tilts the advantage toward foreign stocks to earn higher profits than U.S. stocks.
Holding Steady with Global Stocks
We greatly appreciate the role U.S. stocks have played in pulling our portfolio along this year. However, we believe the time for foreign stocks to start pulling the team may be coming soon. That’s why we don’t want to trade them or reduce their role at this time.
In addition, RegentAtlantic believes foreign stocks currently have three advantages over U.S. stocks:
- A stronger dollar makes global stocks more competitive.
- Their economies have longer to go in an expansion phase than the U.S. economy.
- International stocks are better relative values than U.S. stocks.
Team Spirit is the Key to Long-Term Success
Again, investing is a life-long journey—a repeating ultra marathon, if you will. There is no set finish line to cross. Our goal as investors is to remain healthy and flexible all along the way.
At RegentAtlantic, we’ve built a team of what we believe to be strong investments, all with different strengths to propel us forward on this journey. We continue to believe in our diversified team to provide more consistent results than individuals alone ever could.
As always, please contact your wealth advisor or me if you have questions about your own investing journey.
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.
This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.