Global Diversification Can Help Mitigate Risk


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VIDEO: Ken Fisher on The Importance of Diversification and investing globally

2:44 minutes

Why should you invest globally? What could your returns look like over time if you do? Ken Fisher, Fisher Investments’ founder and Co-Chief Investment Officer, answers these questions and more in this video.

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Diversification is an essential part of investment management, but investors often ask us why global diversification is important.

A diversified portfolio is essentially a way to spread out risk. Achieving global diversification can involve more research as it entails having more potential options to choose from. Many investors are hesitant to invest outside of their home countries, but this can mean missing out on opportunities elsewhere.

Diversification Defined

Diversification is the concept of spreading your risk across different parts of the market. The idea of diversification is to neutralize some of the underperforming areas of the market with the outperforming areas in order to reduce risk.

Diversification can be accomplished in a variety of ways, either from owning equity in various companies, different asset classes, different sectors or even across countries. While many understand the importance of diversification, some investors fail to do this on a global scale.

The Importance of Global Diversification

No single equity style, sector, country or region outperforms all others all of the time. Global diversification spreads risk amongst countries and currencies to offset the concentration risk of investing in just one region or country. It also helps guard against the risk of missing out on global investment opportunities. We believe that globally-diversified portfolios are vital to long-term investment success.

Being able to spread your risk across various countries can shield you from country specific conflicts and regulations. No country is exempt from conflicts or disasters. No matter how stable your home country may seem, you can help reduce these risks in your portfolio by investing internationally. In this way, if one country struggles economically due to regional issues, your portfolio will feel that effect less so than if you had invested more heavily in that country.

Unfortunately, some European investors are not as diversified as they might think. These investors often have a tendency to focus solely on stock markets close to their own countries and financial markets.

Home-Country Bias

If you invest primarily in your country or region you are at the mercy of a psychological phenomenon known as home-country bias—investing only in your home country. With home-country bias, your portfolio returns may be more a reflection of your country’s economic performance rather than of the individual equities in which you invest.

Although investing across various sectors is one form of diversification, investing in just one country introduces an obvious concentration risk: investments will be extremely sensitive to any potentially negative events in that region. If there is any turmoil caused by political, economic or environmental factors, it could greatly influence the value of your investment portfolio. While you have little control over these factors, what you can control is your portfolio’s exposure by spreading your assets across various countries.

Managing Risk

When it comes to investing, risks are inherent. The goal of every investor should be to meet all of their long-term investing goals while mitigating as much risk as possible. This is a practice much easier said than done. If your long-term investment goals require a certain amount of growth, you should understand how much short-term volatility and risk you may need to bear in order to achieve those goals.

Investors often fear short-term market volatility—swings in the value of securities over a relatively short period of time. Yet, many investors may need to endure the short-term volatility inherent in stocks in order to meet their long-term investing goals. For globally-diversified investors, increased foreign exposure may actually reduce some of that volatility at times.

Plus, global portfolio diversification helps reduce your exposure to region-specific and country-specific events which can affect equities or other securities. Political developments, central bank actions, regional wars, and natural disasters can have significant effects on your portfolio if you invest in a single country or region.

While managing risk is an important aspect of your investment strategy, often investors put too much emphasis on reducing short-term volatility and forget about other risks, such as not reaching their long-term investing goals. Investors often think they are protecting themselves by investing “conservatively” in low-yielding securities, like fixed interest or cash. However, if you need long-term growth to reach your investing goals, you may need to look towards higher-yielding asset classes, like equities, to achieve the necessary growth. Don’t let the fear of short-term volatility inhibit your ability to reach your long-term goals.

Rotating Leadership

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 the next year.

Though 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 and prevent you from investing solely in a country providing subpar returns. If done properly, global investing can help reduce some short-term volatility and provide for a smoother ride on your way to meeting your long-term investment goals.

How Professional Advice Can Help >

While investing in other countries or regions introduces the potential for added responsibility and research, an investment adviser may be able to help you analyse which securities are best suited to perform well and help you reach your goals. You may benefit from working with an adviser who focuses on your long-term goals and has an extensive Research Department to analyse global market conditions. In this way, you might be able to shed some of the responsibility that comes with managing an investment portfolio and instead focus on aspects of life that bring you joy—such as spending time with family, traveling or doing other fun activities.

Contact Fisher Investments UK for a Portfolio Evaluation

There's no denying that researching markets takes a great deal of time and expertise, so it follows that exploring global markets presents a far greater challenge, especially for the individual investor.

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 educate investors on its potential benefits. For qualified investors with £250,000 or more in investible assets, we may be able to evaluate your current portfolio to see if it is the most appropriate strategy for your personal situation and long-term 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.

Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.