BLOG: The importance of being geographically diversified

Written by: Andrew Craig
The founder of Plain English Finance Andrew Craig argues investors need to start thinking more globally when it comes to investing rather than staying too close to home.

Jack Meyer, who used to run the Harvard University endowment fund, has said: “The most powerful tool an investor has working for him or her is diversification. True diversification allows you to build portfolios with higher returns for the same risk. Most investors are far less diversified than they should be.”

A consistent strategy for investment success, therefore, is to have exposure to all main asset classes and all the main geographies – to own the world as it were. This works because you are geographically diversified and diversified by asset.

“Geographically diversified” simply means that if one part of the world is having a difficult time, perhaps Europe or the US, you still have a good chance of making money because you have exposure to another part of the world that is going up a great deal, for example certain emerging markets or Japan. Every year, different parts of the world are stronger than others.

Rather than trying to work out where the best place for your money will be next year, which is difficult and time-consuming, it is easiest just to be invested in every major part of the world. This means you benefit from the consistent growth of the world economy as a whole. Bear in mind that the world has only really ever had “down” years across the board in time of major wars.

One of the biggest mistakes people make with their investments is that they tend, in the main, to own assets from their own country. This means two things: Firstly, that when that particular country or geographical area has a difficult time, their investments there will struggle. Secondly, that they miss out on the potential for explosive growth that comes with owning what some would deem to be more exotic parts of the world.

It is worth noting that stock markets in many of the faster-growing areas of the world can double or even triple over quite short periods of time. With that sort of performance you don’t need to have a large share of your money exposed to these markets in order to enjoy a material impact on growing your wealth.

There is no guarantee this will continue. The trend might even reverse, and growth in the US and UK might one day again be better than in places like India. It is also worth highlighting that economic growth and stock market performance are nowhere near as correlated as most people assume.

The key point here is that you may not want to spend too much time trying to work out what is going to happen. A simpler approach is just to ensure that you have exposure to the world as a whole. As the world keeps growing and developing, this approach will give you the best chance of benefitting from that growth.

I would repeat that the only time the world as a whole has failed to grow has been in times of major wars. If we are unlucky enough for “World War Three” to happen in our lifetimes, your investment performance might be the least of your concerns. Having said that, without wanting to sound horribly cynical, smart money has usually found that even wartime can be reasonably lucrative. Even in the case of another world war, there will be opportunities for the informed and enlightened to keep their money safe and possibly even to grow it.

Leaving aside that rather depressing possibility, however, in the more normal run of things, owning the world simply means that you want to end up with exposure to everywhere: the UK, Europe, the US, Japan and the rest of Asia, as well as all the various emerging markets. You will want to own assets in as many places as possible so that you catch those doubles and triples over the years, and benefit from the explosive growth of the global middle class.

One of the reasons relatively few people pursued this sort of strategy in the past is that it used to be very hard for a private individual to invest like this. It is also the case that relatively few financial advisers have a grasp of how to do it. Not that long ago, this sort of strategy realistically wasn’t possible. Today you can get closer than ever before to this sort of asset allocation without paying crazy fees – even if you only have a small amount of money to start with.

Andrew Craig is founder of Plain English Finance and author of How to Own the World


There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Big flu jab price hikes this winter: Where’s cheapest if you can’t get a free vaccine?

Pharmacies, supermarkets and health retailers are starting to offer flu jabs ahead of the winter season, but t...

Is now the time to fix your energy deal?

Fixed energy tariffs all but disappeared during the energy crisis. But now they are back with an increasing nu...

Everything you need to know about the pension triple lock

Retirees are braced to receive another bumper state pension pay rise next year due to the triple lock mechanis...

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

The best student bank accounts in 2023: Cash offers, tastecards and 0% overdrafts

A number of banks are luring in new student customers with cold hard cash this year – while others are compe...

DIY investors: 10 common mistakes to avoid

For those without the help and experience of an adviser, here are 10 common DIY investor mistakes to avoid.

Mortgage down-valuations: Tips to avoid pulling out of a house sale

Down-valuations are on the rise. So, what does it mean for home buyers, and what can you do?

Money Tips of the Week