Investing in the US Markets — for a Diversified Portfolio
The pandemic has changed how investors invest, spend, and set aside cash. These days they are more centered around safeguarding capital and not terrified of investing abroad.
With most of the service-class employees and business professionals looking out for safer bets on their investments in the long run to generate stable returns with lesser risk and to beat inflation, today we look at one such opportunity — Investing in the US markets.
Diversification of one’s portfolio should not be limited to a geographical region. One must always look forward to investing in global markets to achieve such diversification. In addition to this, such investments in the past have outperformed Emerging markets- Indian markets (SENSEX, NSE) by a country mile.
Here are some of the reasons why you should consider investing in the US markets:
Highest Market capitalization
Source: The World Federation of Foreign Exchanges, December 2020. Market capitalization is the number of issued shares of domestic companies multiplied by their respective prices at a given time.
US Stock Indices- NASDAQ 100, S&P 500, DOW JONES Industrials have more market capitalization than the rest of their peers due to listing of innovative companies, low volatility
Better Historical Index Returns
MSCI (Morgan Stanley International) USA index is designed to measure the performance of the US stock market. It is seen that MSCI USA has cumulatively provided better returns compared to emerging markets indices, and other developed markets.
Less Correlation with International Stock Markets
Investors may consider putting resources into stock indices that are less related to their home market. This implies that the market developments are not firmly adjusted, and may behave differently depending on their geography.
Moreover, adding less correlated markets to the portfolio has helped to reduce overall volatility, in the past.
More Exposure to Innovation
With the USA considered as the mecca for technology-driven innovation, IT companies have gained more weightage in the U.S Indices over the years due to their strong performance.
The Influence of FAANG Stocks
Facebook (FB) is the most mainstream social media platform for communication and creative content. Amazon.com (AMZN) overwhelms the E-commerce business with cutting-edge computing innovative solutions. In the Video-On-Demand and online streaming market, Netflix (NFLX) has a huge lead. Google (GOOGL) now known as Alphabet (GOOGL) is the lord of web search. Apple (AAPL) is known for its innovative mobile and computer products.
FAANG stocks are renowned for their strong performance, of late. Having said that, FAANG Stocks have doubled their growth in the last five years. Despite having such growth, FAANG Stocks are not too volatile.
Hence, due to such ability to generate superior returns with less volatility, FAANG stocks are quite appealing to investors.
Conclusion
While investors prefer to invest in their local stock markets due to home bias, they could consider a more extensive range of alternatives to invest in. By taking exposure in global markets, Investors can:
- Plan to increase diversification and reduce risk.
- Be a part of the growth stories of Big guns.
Global markets are evolving. As advancement and development of technology are speeding up in North America, Investors might need to rethink global opportunities.
Written by Aashutosh Chandra (aashutosh.chandra@xumitcapital.com)
