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True Portfolio Diversification for Americans  Thumbnail

True Portfolio Diversification for Americans

When it comes to investing, a keyword is diversification. It is a risk management strategy that combines various investments to help reduce the risk held in a portfolio. A diversified portfolio contains a mix of distinct asset types and investment vehicles to limit exposure to any single asset or asset class. The idea behind it is that a diversified portfolio will, on average, perform better in the long term with a lower level of risk than holding a single investment.1  While many American investors have diversification in their portfolios concerning different asset classes, they lack the ability and access to bring true portfolio diversification because they oftentimes only focus on the U.S. market. While their home market is incredibly important, it is not all the world has to offer. There is a way for Americans to bring true diversification to their portfolio by accessing foreign investments to grow their wealth on a global level rather than just a domestic one. 

Challenges Americans Face in True Portfolio Diversification

While Americans have easy access to the U.S. investment market, they are incredibly limited in building a portfolio that can help mitigate the risk of U.S. politics, debt level, and economic challenges. The reality is international diversification can be a great tool for investors to help capitalize on global opportunities while reducing the risk of a portfolio invested solely in one's domestic investment market. 

Because of this, American investors wanting to invest in foreign companies while holding their investments in the states need to use American Depositary Receipts (ADR). The issue with ADRs is that they are denominated in U.S. dollars meaning the investor does not get the full benefit from investing outside of the U.S., and the value of the investment is still beholden to the value of the USD. This allows the trader of the ADR to benefit from the exchange price and not the portfolio; it is called arbitrage.True diversification is getting a portion of the portfolio totally out of the U.S. investment market and out of the USD. ADRs simply do not offer this to Americans, with their portfolios being held in the U.S. financial jurisdiction and in USD.

Americans' Options for True Portfolio Diversification

So what is the American investor to do when seeking to reduce the risks posed to their investment portfolio by the U.S. government and economy? 

The good news is that there are legal options for Americans to access true diversification. One of these options is finding a financial jurisdiction that allows Americans to use their financial service industry. While many countries allow Americans to use investment banks, not all financial jurisdictions are alike and offer different services depending on how their system is set up. Switzerland is a country that has an incredibly high level of safety, security, and privacy when it comes to helping Americans access foreign markets for their portfolios. Since we are located in Switzerland, we will use it as our reference for the discussion of true diversification. We wrote a blog on the Swiss financial jurisdiction you can learn more about here: Switzerland as a Financial Jurisdiction. The process of opening a private investment account in Switzerland is quite straightforward but does take some time, about 4-6 weeks. However, since investing is a long-term game, it can be the right move to help Americans invest directly in foreign equities. It allows true diversification to be added to the overall portfolio. 

Then comes the question should an American go directly to a private bank or work with an asset manager? This question comes down to each individual's financial situation. Private banks offer robust infrastructure; however, often, their initial minimum investment for an account to be opened ranges from $1-3 million. Further, when you open an investment account, a relationship manager will be assigned, and you (the client) will be one of a few hundred clients being managed by the same person. In this case, the portfolio will often be built based on the investments suggested by the bank's investment department and are often times inhouse products that might be expensive and not tailored to your specific situation. 

Another option for Americans is to use a Swiss independent asset manager. In such a setup, the Swiss asset manager has set up agreements with private banks, and this allows them to reduce the minimum investment size for an account to as low as $250k, allowing clients to wade into the waters of international diversification to see first hand the benefits it can offer. A further plus of a Swiss independent asset manager is the flexibility it provides. Due to the contractual agreements set up between the asset manager and the private banks, clients can have multiple accounts in multiple banks, all while having one relationship manager. While not always wanted or needed, it shows the strength in continuity that the Swiss asset manager can provide to Americans seeking the best services. Also, because asset managers are often smaller in size, a relationship manager will only be managing 20-60 clients, allowing them to build a trusting relationship with each client. With an asset manager, you are an individual and not a number. Because of this, it also allows the portfolio to be built in a way that will complement your existing portfolio. Finally, the Swiss asset manager is totally independent and is not pressured to sell you any particular products. They are there to build a portfolio that will best serve you. 

Using a Swiss independent asset manager offers Americans the best of both worlds as it gives them access to some of the best private banks in the world while offering a holistic and personalized service built on trust with the client's best interest in mind, building a portfolio that is truly diversified. 

You can learn more about the benefits of working with a Swiss independent asset manager here: The Benefits of Swiss Asset Management for Americans 

And learn more about what it is like working with a Swiss independent asset manager here: Working with an Offshore Registered Investment Advisor

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  1. https://www.investopedia.com/terms/d/diversification.asp
  2. https://www.investopedia.com/terms/a/adr.asp