As a financial advisor I spend a lot of time figuring how to design a great investment portfolio that is specific to the needs of each particular client. One part of my strategy that I use in every portfolio use is the concept of diversification. And one type of diversification that is often underused or underappreciated is the idea of investing in international companies.

The obvious question is why we would invest in companies outside the U.S. when it is generally agreed that we have the best economy and stock market in the world. There are several good answers to that question, starting with the one I mentioned above—diversification.

Currently, over 60% of the value of all publicly traded companies worldwide is in U.S. businesses. That means that upwards of 35% is not in the U.S. It is in “developed nations” like Canada, France, Germany, and Japan. It is in “emerging nations” like Brazil and India. History shows that there are times when the U.S. market outperforms other markets around the world, and there are periods when other markets around the world outperform the U.S. market.

By investing a portion of your portfolio into international businesses, you can reduce risk in your portfolio while potentially giving up nothing on your returns. That fits with the sound investment philosophy of minimizing risk for a given level of expected returns.

Emerging markets are known for producing higher GDP rates (economic growth) compared to developed countries like the U.S. That’s not always the case, but when it does happen, it can lead to excellent returns. Having a piece of those companies in your portfolio is a nice counterbalance to owning a lot of U.S. stock.

Another point is one about company valuations. Currently, the P/E (price to earnings) ratio of U.S. stocks is 26, which is well above the long-term average. The current P/E for Developed countries is 16.9, and the P/E for Developing nations is even lower. That means international stocks are currently cheaper to buy than U.S. stocks. That’s no guarantee, of course, that international stocks will outperform U.S. stocks over the next year or 10 years, but there is a long history of the P/E ratio reverting towards the mean, in which case we would see international stocks outperform.

Diversification is primarily about reducing risk and volatility without giving up returns. Since 2010, the U.S. markets have outperformed international markets significantly. However, the period from 2000-2009 saw a strong outperformance by international stocks. Having both of these investments in your portfolio allows you better smooth out the ups and downs of the markets while usually maintaining similar returns over the long run.

Let’s compare this to skiing. When a storm rolls in, there’s no guarantee of which mountain in the region will get the best snow. Many locals will tell you that Kirkwood most often gets the best snow. However, there are storms where either Heavenly or Northstar surpass the snow totals received by Kirkwood. Wouldn’t it be nice if you could take advantage by having all three

ski areas in your skiing portfolio, so that you can always enjoy the best conditions? Hint…you can…

The bottom line is that investing in international companies is a smart strategy. This strategy diversifies your portfolio while opening up access to different markets. Best of all, there are plenty of international ETFs and Mutual Funds that you can buy while still keeping your investment costs fairly low.

How ever you choose to diversify internationally, invest smartly and invest well!

Larry Sidney is a Zephyr Cove-based Investment Advisor Representative. Information is found at https://palisadeinvestments.com/ or by calling 775-299-4600 x702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Past Performance does not guarantee future results. Consult your financial advisor before purchasing any security.