Investor´s Strategy: Diversification Globally Across Jurisdictions
The benefits of diversification and sizing your allocation are always counterweighed against expectations of market volatility both at home and abroad. These expectations push many investors to diversify their portfolios by holding securities across different asset classes and sectors, but the majority are rooted in their home countries.
In U.S.’s case, its stocks have outperformed international stocks for more than 10 years, which adds fuel to the fires of questioning the merits of global asset allocation.
This is natural, in investing—as in other areas of life—people frequently display a home-country bias.
To some extent, variation in perceptions of the challenges across countries reflects differences in the approaches and individual autonomy related to investment, in legal frameworks and in the extent and maturity of decentralization.
How can you overcome home-country bias?
The first question you need to ask yourself is: Do you really want to limit your investment opportunities?
Investing globally can improve sector diversification as you gain exposure to industries under-represented in your home country.
As a rule, more centralized countries report greater problems for co-financing and integrating sectoral priorities to balance economic policies that ensure industry -and national/sub-national- development. Contrasting with this, federal or quasi-federal countries, -where layers of government are well-established- an industry diversification and a national growth probability is increased.
With investing is the same: the more centralized you are, the more limited your opportunities become. The world understands this and that’s why a move towards connection, inclusion and globalization is the current trend.
Going global to diversify. Is Investing abroad the right call?
In spite of the home country bias, the truth is that investing globally can:
- Increase return potential of your portfolio.
- While also lowering the volatility
- And enhancing diversification.
Regardless of where they live, investors have a significant opportunity to diversify their equity portfolios by investing outside their home market. Actually some analyses have stated that the average volatility of investment portfolios is reduced between a 40% and a 50% with the right allocation of international equities.
So, adding global exposure increase returns and reduce volatility.
But, increasing global exposure can actually reduce your country-specific risk and allow you to take advantage of foreign economic growth and innovation.
Global exposure to your investment portfolio, how much?
The adage “don’t put all your eggs in one basket” is one that will always remain vital for investors. You have U.S.’s large-cap stocks:
- These were the top performer over 2009-2019
- Did not finish among the top five asset classes in any calendar year from 2000-2009
- And were the worst-performing asset class over this period.
An asset class that performs well one year might be a poor performer the next and if you notice the patterns, U.S. large caps stock are reaching the end of their cycles.
The standard financial-theory approach to how much should you invest in stocks or securities for a global allocation or within a specific foreign country or market, is to invest proportionally to market capitalization.
For instance, U.S. investors would invest 55.1% of their equity portfolio in home groomed equities while investors in countries such as Japan, the U.K., Canada, and Australia would allocate less than 10% to their domestic stock market.
What are the main hurdles of a truly global investment portfolio?
To summarize, you have the local jurisdictions, governance, market conditions and legal framework. All of these aspect change from country to country and they need to analyzed thoroughly before committing to any foreign stock.
The ones most influential are your periods of local market stress, when correlations tend to increase. Due to this, we -from time to time- experience bouts of volatility and fluctuating correlations worldwide, when what you want to achieve by embracing global diversification is an asymmetrical asset movement that lessens your portfolio’s overall risk tendency.
Exposure to fluctuations in foreign currency exchange rates is another significant hurdle to consider.
Long term, currency has no intrinsic return—no yield, no earnings growth. Currency exposure affects only return volatility in the long term, and its contribution to it needs to be taken into account. Also, currency is susceptible to correlation as well, this will affect the underlying asset and your risk tolerance.
How to achieve an effective, globally diversified portfolio?
Reviewing your asset mix to ensure they’re effectively positioned to benefit from growth opportunities around the globe, take advantage of current and emergent market trends, instead of relying solely on the strength of a single country’s commodity markets is good place to start reaching your investment goals.
In today’s, is an increasingly common practice to move asset allocation beyond domestic stocks, securities and fiat currencies and into global diversification across jurisdictions, equities, fixed income and non-traditional investments.
This requires a long-term view, not to be undeservedly influenced by immediate contemplations.
This is an investment strategy for endurance that requires patience and discipline. It should be based on your experience, cash-flow needs, risk tolerance and your investment time horizon. Revisit your allocations periodically to see if there’s a change in a market or asset’s circumstances.
Adding diversification through increased exposure to global market avenues and diminishing “single country risk” should be contemplated by any investor, regardless of their risk profile.
Is there any mid-term solution?
We’re talking about making money here, so don’t get me wrong, but the global market is growing at a very fast pace. Which brings us to our next option: disruptive assets in emergent markets.
This type of avenues perform well against recessions and -if they’re successful enough- they have a tendency to reach global adoption which makes them an incredible tool against your portfolio’s correlation potential.
Companies with a great ROI projection that has scalable business models for a large enough target market, like the ones on a technology-related sector or that show disruptive business models, since these have a bigger chance to grow and provide investors with the type of returns that they are looking for.
And the ones that are positioned on a market that’s on the rise grants you more growth potential, which ultimately leads you to exponentially higher returns, portfolio diversification and protection against correlation.
Right now, it looks like FinTech companies are on the rise for the sheer fact that the new developing tools they’re creating for investing work outside of the current markets.
There is an opportunity in the Fintech sector that truly circumvent all the hurdles that foreing investment represents for investors.
A new form of stock-like liquid tradeable instrument that expands the investor’s reach beyond currently localized markets. Help them leave behind language barriers, international fees, or currency conversions so they can acquire the investments they want and move on to the next opportunity.
Now… if you’ve made it this far it’s because you’re looking for something different and effective to make your money grow.
This is an avenue that also have the following features:
- Calculated risk.
- A clear exit strategy.
- A trillion dollars market
- And yearly dividends
This is a serious chance to get on the ground-floor of an ambitious, solid, visionary and profitable project that will change the status quo of how finances and investing are done…
And you can find out more about it here!