We all know that a diversified portfolio is the bedrock of a solid investment strategy, but the decision to build a global portfolio can nevertheless be daunting. It can feel intimidating to start buying assets in other markets, and assessing the risks can be tough. However, there are a number of reasons why it’s worth facing your fears and building a diversified, global portfolio.
- Benefit from geopolitical diversity
Perhaps the most important benefit of investing in a variety of different geographic regions is the ability to spread your geopolitical risk. When all of your assets are domiciled in a single country, you are taking a very big gamble on the future of that country. You’re assuming that the country will remain stable, well-governed, and economically prudent for many decades, and will deliver sufficient, inflation-beating returns to meet your financial goals.
Now, sometimes that kind of bet pays off, but there are plenty of examples of countries that seemed solid but still suffered extended periods of collapse or downturn – think of Zimbabwe, the Soviet Union, and, more recently, Greece. By diversifying globally, you spread the risk. If you’re invested in five different countries or regions, it’s unlikely that you’ll lose everything if one of them collapses. Given the precarious macroeconomic position many countries find themselves in these days, a little diversity seems like a very good idea.
- Benefit from currency diversity
To be honest, exposure to different currencies can be either a good or a bad thing – timing is a key factor. But investing offshore can be a good way to mitigate the risks associated with holding all of your assets in a single currency. By holding assets in dollars, euro, and yen, you can help protect your net assets against a fall in one of the currencies.
- Get access to different sectors and companies
I think this is one of the most exciting aspects of global investing. Depending on what country you live in, you’re going to have access to different sectors and industries. For example, if you live in the United States, your domestic portfolio will probably include a lot of major tech stocks. But, if you live in another region, you may not have much in the way of access to interesting domestic tech options. By diversifying globally, you’ll be able to access sectors and industries that you wouldn’t otherwise be able to access, which can enhance your portfolio and improve your returns.
- Take advantage of different growth/conservation opportunities
Different regions have different risk/reward profiles. For example, a country like India offers the potential for a great deal of growth, but it also holds the potential for a lot of risk. In contrast, a country like Germany has the opposite profile – low levels of risk, but also lower potential returns.
When building a diverse domestic portfolio, investors often think about diversifying across asset classes to balance risk and capital preservation. But by adding a layer of geographic diversity, you can balance risks within asset classes to an extent – the risk/reward profile of European equities is very different to the risk/reward profile of Chinese equities, and including both in your portfolio can help you manage your overall risk/reward balance.
- It’s easier now than ever before
The final, compelling reason to start building a diversified global portfolio is that it has never been easier to do so. Thanks to a combination of deregulation and technological improvements, investing in global assets is now a matter of a few clicks. And there have never been more options – global ETFs that focus on different regions, countries, sectors, or returns (like global dividend funds).