I periodically recycle old posts on my blog to ensure that new clients can benefit from valuable content they may have missed. Today, I’m revisiting a post on global diversification for those interested in navigating the global markets.
Over the years, I have delivered presentations on global market opportunities at numerous events. Typically, I pose a single question to investors: “What percentage of your investment portfolio extends beyond your domestic borders?” Interestingly, the responses vary, yet the majority tend to indicate minimal exposure to global markets.
Some investors are always wondering if they really need to invest outside the country. Whenever my capable financial partners who are experienced wealth advisors look at a prospective client’s investment portfolio, they rarely see one that is globally diversified.
Should anyone be surprised? Every country in the world suffers from this home country bias. What is “home bias”? Home bias is the tendency for investors to invest in a large amount of local investments despite the benefits of diversifying into other markets.
Well, they are not stupid people. It is just that most investors tend to invest in what they know. They tend to lean toward the familiar. Because it may also have to do with the way that people have been trained for such a long time to think about the investment process, some believe their favorite local investments will tend to outperform other opportunities.
Home bias is not necessarily a bad thing as it is important to have a good understanding of your investments. However, it becomes damaging when the blinders are put on and people refrain from learning about other opportunities to take advantage of the changing economic and market conditions around the world.
Also, you are getting less diversification in your portfolio, and as a result, your portfolio is likely to have greater volatility and realize lower returns over the long-term. There is also opportunity cost.
By not investing outside your home border, you pass up opportunities to invest in other markets where the risk and return trade-off might be more attractive. Your investments may be what everyone owns back home, but there are plenty of less volatile places to get long.
What about currency diversification? You might have noticed that the local currency has been looking a lot less triumphant. That means investments denominated in other currencies are worth more in local terms. Additionally, it is crucial to acknowledge the economic challenges within our own borders before focusing on issues in other parts of the world.
We are in a different world than 10 years ago in terms of how easy and effective it is to invest in anything globally. There are different ways in which you can invest in global markets without having too much trouble.