The importance of global diversification
Most seasoned investors understand the benefits of diversification. Few think it wise to hold just a few stocks or invest heavily in just one sector. Intuitively it makes sense, and finance theory agrees: diversifying is central to risk management and vital to long-term investment success.
Yet, most American investors aren’t nearly as diversified as they think. American investors tend to focus on US stocks. After all, America is a big country. Shouldn’t investing here be enough?
The answer may surprise you. A portfolio with only US stocks misses out on an important factor — the rest of the global stock market. America represents only a little more than 50% of the world’s developed equity market (as measured by market capitalization), and less than 40% of the global economy.
Imagine investing in only half of the S&P 500 sectors. Consumer Staples, but not Pharmaceuticals. Tech, but not Energy. Most agree that’s a riskier undertaking — what if you picked the worst sectors and missed the best? In the same way, a US-only portfolio can also be risky — it can lack the opportunities for both performance enhancement and risk management that you could get in a global portfolio.
*Pacific includes Australia, Hong Kong, New Zealand and Singapore
Source: Thomson Reuters as of 12/31/2013. Values may not sum up to 100% due to rounding. The MSCI World Index measures the performance of selected stocks in 23 developed countries and is presented inclusive of dividends, the effects of withholding taxes, and uses a Luxembourg tax basis.
Mr. Sunil Kewalramani is a professional money manager and a leading consultant on global asset management. He contributes regularly to leading business dailies and journals.
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