Investing can be an extremely educational practice as new opportunities and market developments can present valuable lessons. Media outlets can make fad investment strategies—such as attempting to track an index—seem like potentially risk-free or intelligent solutions. However, your investment strategy should be personalized to your long-term investment goals and help you create a well-diversified investment account.
Some investors might make the mistake of only investing in their home-country or region. It makes sense that investors feel safe investing in what they know and companies they are familiar with. This strategy might feel like safe at times, but it ignores one of the biggest investing pitfalls: concentration risk. Concentration risk occurs anytime you invest too heavily in any single security or groups of securities that act similarly, such as stocks in one market sector or bonds of the same duration.
Limiting your investing to very specific areas of the market like your home-country may cause your portfolio to be more sensitive to localised events, such as national politics, currency fluctuations and extreme weather, can affect a market sector or region greatly, potentially having an outsized effect on your account. This increased sensitivity to local markets may also limit your investment options, potentially hindering your ability to reach your long-term investing goals.
In this article, we’ll discuss the benefits and merits of investing internationally.
Diversification is the process of combining securities with differing characteristics and influences to reduce risk in a portfolio. You can achieve diversification across various market sectors, company sizes, countries and other parameters. By combining securities with little-to-no correlation, you can mitigate some of your portfolio risk, as these securities may react differently to various market environments and developments.
Global diversification can have many benefits for investors if used correctly. For example, if your portfolio only holds securities in Europe or any single country, this not only creates concentration risk, but it also ignores potential opportunities in other countries and areas around the globe. International investing gives you a larger pool of investment options to choose from, potentially allowing your more flexibility in your strategy. For example, if you would like to invest in large Technology companies, your options may be limited depending on your home country. However, if you are able to invest internationally, you can choose from some of the largest Technology giants in the world.
European equities make up just one piece of the total international equity market. If you choose to put all your money in European markets, you risk missing opportunities available in the US, China, Japan and other parts of the world.
Sometimes, investors mistakenly believe that investing in various equities or funds makes them adequately diversified, but diversification needs to be executed thoughtfully. Simply owning mutual funds, equities or fixed-interest securities in a single country isn’t enough to properly negate concentration risk. Mutual funds have differing investment styles, and simply owning a mutual fund doesn’t mean you’re well-diversified. For example, a mutual fund may target small, European healthcare companies. This kind of fund would invest in multiple securities, but those securities would likely be very similar and vulnerable to many of the same risks.
Further, investing internationally could help insulate your account from feeling an outsized effect from any of the following events:
Investing across multiple countries and regions can decrease your portfolio’s sensitivity to the individual risks of each country. Thoughtful, global diversification can help you avoid overexposure to these risks in any one country, region or sector. This approach can protect against the impact of domestic downturns and also exposes portfolios to more potential international investment opportunities.
No single asset, sector, region or country outperforms all others all of the time. If this were the case, every investor would know which countries to invest in. Instead, global leadership may rotate from year-to-year. While your home country may outperform other countries in any given year, those other countries could just as easily come out on top in the next year.
At Fisher Investments UK, we believe one of best ways to increase opportunity and reduce risk is to invest globally and to diversify your portfolio among various countries, sectors and much more. We believe that your investment portfolio should be structured to ensure broad international exposure and this will help mitigate your portfolio’s concentration risk and country-specific risk. While no single country, sector or style is best to invest in all of the time, a globally-diversified portfolio can increase your chances of capturing the best-performing areas in any given year and prevent you from investing solely in a country providing subpar returns in any given year.
Fisher Investments UK believes global diversification is an important consideration for investors, and we are committed to providing the education and resources necessary to help investors discover its potential benefits. For qualified investors with £250,000 in investible assets or more, we may be able to evaluate your current portfolio to see if it is the most appropriate strategy for your financial goals. We can then suggest a custom asset allocation with the aim of helping you build a global portfolio suitable for your needs and goals.
To learn more about Fisher Investments UK and our approach to international investing, please contact us or download one of our many educational investment guides.