Savvy investors learn an early lesson: Diversify to avoid taking on too much risk. Concentrating your wealth in limited areas of the market can leave you vulnerable to events that impact those areas but leave others unscathed.
A portfolio that fails to diversify properly across countries could mean higher levels of volatility and missing certain investing opportunities. Fisher Investments and its subsidiaries approach investing from a global perspective. We invest globally to help hedge against country-specific downturns, expose portfolios to more opportunities, diversify and reduce volatility.
We believe someone who fails to take a global asset management approach with their portfolio can end up with risks similar to those of an investor who fails to diversify their portfolio across sectors. Consider, for instance, an investor who puts most of their money into a few sectors such as Health Care, Consumer Staples or Utilities. If the market weakened, that investor might do relatively well through exposure to traditionally “defensive” sectors, but may miss out if the market rebounded and boosted other sectors such as Information Technology.
Many investors understand this intuitively but fail to extend that logic when it comes to exposure across countries. Even domestic multinational corporations—companies that generate large amounts of revenue globally—can’t provide sufficient global diversification for an investor’s portfolio, in our view. Multinationals tend to perform like their home country because they are generally subject to the same factors impacting equity prices in its home country—regulatory changes, currency fluctuations, monetary policy and access to credit.
Leadership rotates between different geographies, just as it does between sectors. As a result, another advantage of a geographically diverse portfolio is helping reduce volatility. With less volatility, investors may sleep better at night and be less likely to act on spur-of-the-moment, emotion-driven decisions that could harm their long-term returns.
We believe geographic diversification is central to risk management and vital to longer-term investment success. We understand that countries’ equity markets don’t move in lockstep and that opportunities might change depending on market conditions and economic developments globally—which is why we adjust the country and sector weightings in client portfolios depending on our forward-looking outlook.
However, whilst we believe geographic diversification is good overall for most investors, just like any other kind of investing, it comes with risks.
For instance, political systems and regulations operate differently between countries, so it is important to understand these distinctions and variations before investing in certain regions. Other risk factors to consider include currencies and taxes. Foreign exchange rates vary from market to market and can sometimes experience periods of price volatility, which can affect equity market performance. Foreign tax rates, too, can ebb and flow as economic and political drivers change across nations.
Fisher Investments and its subsidiaries have managed global investments for institutional and individual investors for decades. Contact us for a portfolio evaluation and to learn more about how we can provide a global asset management solution tailored to your needs.