Question: How global is the US economy?

From Greg on the Marketplace Money Facebook page:

I'd like to hear more on how the US economy is global, and therefore how can an average American know they are 'safely' invested to participate in the global economy.

Response:

The U.S. economy and other economies around the world are increasingly integrated. America’s domestic market is so large that the economy is less dependent on international trade than, say, Sweden or Singapore. Nevertheless, the U.S. economy is global.

For example, total trade — exports plus imports — accounted for 31% of America’s gross domestic product in 2012. Among the companies that comprise the Standard & Poor’s 500, about 46 percent of all sales were produced and sold outside the U.S. The dollar is the world’s anchor currency. Immigrants have come here in record numbers over the past two decades. You can see globalization under the hood of a so-called American car where the parts come from all over the world and at the local grocery store stocked with foods produced elsewhere.

The trend toward stronger international ties opens up opportunities for investors. It’s easy to place bets on fast growing emerging markets and world-class companies in Europe and Japan. On the other hand, the benefits of international diversification have shrunk somewhat in recent decades. The global bonds of trade, commerce and capital are strengthening with the embrace of freer markets by most nations. Equity markets march more in lockstep than before (think the global meltdown of 2008). Overseas diversification as a risk-reduction strategy is less effective in the short-run, say, six months to a year. Longer than that, I think it still works as a relatively easy and savvy risk reduction strategy.

Among the safe ways to participate in the global economy is by investing in Apple, Intel, Coke, Gillette, Procter & Gamble and other U. S. multinational behemoths. These corporate giants operate in scores of countries, although the ups and downs of the U.S. stock market and business cycle strongly influence their equity performance. Another good strategy is to own overseas shares through low-cost broad-based international index funds. This strategy eliminates some of risks associated with going overseas. Countries can devalue their currencies or clamp on capital controls. Accounting standards are weak and economic information poor. Political instability is a fact of life. Emerging markets are extremely volatile. Nevertheless, for long-term investors the strategy that seems to make the most sense in a global economy.

The standard financial advice is that American investors comfortable with investing in equities abroad should place 10 percent to 30 percent of their portfolios into international securities. I think that’s a reasonable guideline. However, if the idea of risking money outside the borders of the U.S. is unsettling, you can still participate in the global economy by investing in blue-chip U.S. headquartered multinationals.

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