Why it’s important to have geographical diversification in your investments

When we talk about investment diversification, often people think about different asset classes or even different industries, but a critical one is geographical diversification.  Essentially, this is about ensuring you have assets in different countries and regions across the world to minimise your exposure to one market. It also enables you to gain exposure to economies with different growth rates, from emerging markets to developed economies.

While it has always been important, with economies across the globe impacted differently by COVID-19 and recovering at different rates, it’s worth revisiting in the current climate.

During COVID-19, we saw how government stability, leadership, health systems and response to the crisis had a significant impact on economies and financial markets, and this is worth considering when it comes to your investments. Here are just a few things to think about when considering the geographical diversification in your portfolio.

A limited market may limit opportunities

In Australia, our stock market is limited compared to those in US and China. It makes up just 2% of global markets by market capitalisation and is dominated by legacy organisations, like large mining companies and the big banks. If you are only investing at home, you may be missing out on a wealth of opportunities in growth industries and potentially limiting your returns.

Investing in bigger markets, like those in the US, opens up opportunities to invest in different industries, like tech, as well as in large multinationals who may be more protected from volatility as their revenue streams are spread across the globe.

Emerging markets can present new opportunities

Often when people hear about investing in emerging markets they think of smaller and more volatile economies. It’s worth noting, however, that China, a significant driver of growth, is also classed as an emerging market.

While you might not want to consider direct investments in markets that you aren’t as familiar with, there are many broad-based exchange traded funds (ETFs) and managed funds that can provide diversified, lower risk exposure to this growth. Of course, the risk/reward ratio varies wildly across these markets, so it does pay to tread carefully and seek expert advice.

Market concentration is a risk

The reality is that most people tend to have a vast majority of their investments in their home country where they may also own the family home and/or investment property and earn their primary income.  Of course, it makes sense that people would lean towards having their investments in a market they understand and trust, but it really is putting all your eggs in one basket.  No matter how much trust you have in your home economy, it can be risky.

That’s not to say there aren’t risks with geographic diversification, but done right, you can alleviate these by having your assets across a number of markets.

Navigating geopolitical and currency risks

Of course, when you invest in different markets, you do open yourself up to other risks such as currency fluctuation and of course, the geopolitical climate, but you can spread this risk with the right diversification strategy. If you have enough diversification, you can protect yourself and withstand changing geopolitical circumstances in some markets.

When you invest in unhedged global ETFs and managed funds, you are investing in the local currency, so it can open you up to currency fluctuations.  There are hedged ETFs and managed funds that limit the risk of currency fluctuations.

Essentially, hedged options are converted from the local currency to the Australian dollar and the exchange rate is locked in at the time of purchase, meaning you won’t be adversely affected by currency fluctuations. Unhedged options, on the other hand, are entirely exposed to the currency market and you will feel both the negative and positive impacts of currency movement.

Which option is right for you depends on your risk profile and tolerance for volatility, so this is another area where expert advice can really help you navigate your options and strengthen your portfolio.

Expert advice is invaluable

As I mentioned earlier, many investors stick to homegrown investments because that is the market they know and have a greater sense of trust in.  And it’s easy to see why. It’s simply not possible as an individual investor to be across every single market, pending legislation or regional tension that could impact your portfolio.

I am part of the investment team here at Apt, and that’s what we do every day.  Leveraging our expertise and relationships with research houses across the globe, we keep your Apt Adviser informed so that they can provide you with real-time advice and adjust your portfolio to address emerging issues and realise opportunities. This way, you don’t need a wealth of knowledge to start diversifying your portfolio and exploring new markets.

If you’d like to increase the diversification in your portfolio, get in touch with Apt and we can help you get started.

General Advice warning

The information provided in this blog does not constitute financial product advice. The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. Apt Wealth Partners (AFSL and ACL 436121 ABN 49 159 583 847) and Apt Wealth Home Loans (powered by Smartline ACL 385325) recommends that you obtain professional advice before making any decision in relation to your particular requirements or circumstances.