Journalist Thomas Friedman’s assertion that “the world is flat” is truer than ever, advisors say, as the correlation between countries around the world has increased dramatically, adding to volatility of client portfolios.
“We run quantitative models and we tend to be U.S. centric because the U.S. represents 40% of worldwide consumption,” says Jeffrey Powell, managing partner of San Francisco-based Polaris Wealth Advisors.
That said, four decades ago, that percentage was around 70% -- a reflection that investors are decreasing their U.S. allocation for a more global weighting.
Still, the U.S. economy is bigger than the European countries put together, and around twice the size of China's. “We're still the largest economy and the largest consumer of goods -- you have to start with the U.S.,” Powell continues. “But as the population continues to grow and as wealth is distributed globally, the U.S. is less and less as a factor in an overall allocation.”
To deal with increased global volatility that comes from a more interconnected world, exchange-traded funds have become an important tool for investors to allocate to a range of markets. As of last month, global exchange-traded funds and exchange-traded products reached record global net inflows of $73.4 billion, according to ETFGI’s Global ETF and ETP industry insights report for the first quarter.
"Markets have always been volatile, and they'll continue to be, but the job of an advisor is to help their clients relax and think long-term," says Rocco Carriero, an Ameriprise Financial advisor.
And that can be difficult. To respond to short term volatility, or a client’s reaction to volatility, an advisor may need to alter the portfolio, says Allan Roth, founder of Wealth Logic. "If you can't convince clients that there is little evidence of increased volatility over the long-term, you might just consider giving them more conservative asset allocations - particularly lately, with U.S. stocks at or near an all-time high," Roth suggests. "With less money in equities, clients may be less likely to panic during the next market plunge.”