How to Diversify through a Global Portfolio
Diversification means that if one part of your investments goes down, the other will likely be stable or growing.
So how do you diversify? You could invest in a different range of stocks, for example by picking different industries. Another way to diversify is by going for stocks in different countries.
Benefits and risks of going global
If you only invest in one country, you essentially limit yourself to how well that economy is doing at the moment. A European country might be experiencing a downturn, whilst an emerging market economy might be booming. Investing in international stocks can therefore help you to spread your risk.
It’s important to highlight that all investment still comes with risk, and it will never be possible to completely eradicate this. We saw this in the 2008 financial crisis – not only did investments in different sectors lose value, but they pretty much lost value in most countries across the world.
While you can invest in different sectors of your own country’s economy, you can also diversify by going global. Typically, a country is either seen as a developed or an emerging market. We break them down for you.
There are around 30 developed countries in the world, including Western European and North American countries, along with Japan. These nations have the most advanced technologies, factories and manufacturing processes in the world. They also tend to have better infrastructure across their countries, with airports, highways and railways connecting people and businesses.
Income also tends to be a lot higher, which mostly leads to more consumption of products and services.
There are around 30 emerging markets, which are mainly based in Africa, Eastern Europe and Asia. You may have heard of the BRIC nations, often referred to as the largest emerging countries – Brazil, Russia, India, and China. Others include Mexico, South Africa, Taiwan, and Turkey.
These countries typically have less income per individual, less economic and political stability, less advanced manufacturing and weaker infrastructure. Their currencies may go up and down more frequently, which would affect your investments.
Where should I invest?
This depends a lot on your risk profile, but also on what you may or may not know about different countries. It’s probably fairly obvious that developed countries are a safer bet for investment. However, with safety you’ll typically also see lower growth potential. As we said – these countries already have the most advanced technologies and markets around.
So it’s in emerging markets that you’ll find higher growth potential as they catch up to what the developed countries have already achieved. But remember: because of the risks we highlighted, these countries are more risky to invest in and you may see negative returns.
Global Diversification with Wombat
Do your research and look around the world when hunting for your next investment. With Wombat, you can invest in ETFs, single stocks, or even pick a handpicked collection of some of the world’s best stocks as part of our ‘themes’ offering. Get started with as little as £10 today.