Diversification - Business stands on moon and looks at world

If You Lived on the Moon…

… where would you invest your money on earth?  Why limit your investment exposure to just one geographic region or stock market? Take advantage of diversification instead.

The chart below illustrates the relative size of stock markets around the world:

For many investors the local stock market makes up just a fraction of global stock market capitalisation, yet they invest solely in their home market. Limiting your investment exposure to just one country or region can greatly increase the risk of your investments under-performing over an extended period of time.

 

What about diversification?

If you could invest anywhere in the world where would you choose?  Would you really choose to invest 100% of your money in a country such as the UK which makes up just 5.3% of the world’s stock markets?  Japanese investors have seen the risk of lack of diversification over the last 25 years. Their Nikkei Stock exchange is worth less than half its value of 25 years ago. This is despite many other countries flourishing during this time. So rather than limiting your exposure to one economy, why not add diversification and spread out the risk?

 

How to invest for diversification?

How do you access a wide range of economies? Well, you can either select companies based in each country or you can invest in companies that have exposure to these economies around the world. Consider Diageo plc. Its headquarters are in London and its primary listing is on the London Stock Exchange; but 76% of its revenue comes from outside of Europe. It has a presence in 180 countries around the world, and as the economies of these countries grow so will Diageo’s revenues and profits. It also has a good balance between developed markets and emerging markets with 43% of its business coming from the emerging markets in Latin America, Asia, Africa, Eastern Europe and Turkey.

Rather than relying on the fortunes of one economy, why not invest in multinational equities such Coca-Cola, Diageo, Colgate-Palmolive and Johnson & Johnson? Their products are purchased around the world every day, and with the global middle class set to grow exponentially over the next 20 years, their sales and profits are likely to grow in direct proportion. Add to that the fact that they are easily accessible through the primary stock exchanges in the USA and UK and starts to make even more sense, doesn’t it?