International diversification within your investment strategy allows you:
The opportunity to access the complete set of global investment opportunities.
For example, Latin America's largest markets Brazil and Mexico represent respectively only 1.02% and 0.57%* of the total capitalization of global companies, so if the majority of your portfolio is allocated to your local market you are missing out on most of the global opportunities.
*Source: ASWI MSCI Index on March 10, 2014
Risk Diversification. Thanks to investments in different markets, you are exposed to different sources of returns and volatilities. Because market returns are not perfectly correlated, when combining different investments you can diversify part of the non-systemic risk of a specific market, hence reducing the overall volatility of your portfolio.
Two arguments in favor of international diversification.
1. Will the performance of the local market provide financial stability on the long term for my client?
As you can see in the table below there is no consistency in market returns year over year, and there is no single country that was the top performer 2 years in a row. Diversify your portfolio to mitigate country/region risk and decrease the volatility of your portfolio.
* Source: Bloomberg as of December 31st, 2013.
2. Can my client always generate long-term positive performance investing in just one market?
Historically, no single country or region has provided a steady investment to completely guarantee the financial goals for each client. Even developed, larger and stable markets that are considered 'safe' can underperform for extended periods of time. For example, if you take Japan equities which was the largest market in the world by market capitalization in 1989 and you had invested only in this market since then until October 2014, your investment would have fallen by 39% vs a 246% positive return if you had invested in a diversified portfolio including all countries world equities as represented by MSCI ACWI.
* Source: Bloomberg, October 31, 1989 to March 21, 2013.