Good investments are not restricted to borders. Of course, there is a sense of familiarity that often binds us to our home countries, especially when it comes to equity investments, but diversifying to other foreign countries has its merits.
Consider these numbers. In 2020, the US stock markets made up more than half of the world stock market capitalisation at 55 per cent as per a Credit Suisse report. This is followed by Japan at 7.7 per cent, UK at 5 per cent, China at 4, followed by the rest. If you are ignoring foreign markets, you are potentially ignoring an easy way to substantially diversify your stock portfolio and also an opportunity to earn better returns.
To put things in perspective, let’s look at the historical returns of various equity markets. Over a period of 120 years, from 1900 to 2020, the Australian stock markets have given annualised returns of about 9.8 per cent, followed by US stock markets at 9.6 per cent. These numbers are from Credit Suisse Global Investment Returns Yearbook 2021. Emerging markets have given 6.9 per cent during the same period and European markets tad above 7 per cent.
The point of such comparisons is to show what investors lose by restricting their investments to one particular country.
“Indians mostly look at investing in India. Emiratis invest in local markets. Brits and Americans in respective markets. But as an investor, you should remove home bias and build a diversified portfolio in terms of asset class and geographies. If your home market does not do well for 10 years, but maybe the European markets or Japanese markets do well, it will protect your gains,” says Steven Downey, Portfolio Manager, Mada Capital.
It is not the question of ‘either-or’ strategy as most people view it. Stocks of different countries can and should co-exist in a portfolio, just like stocks of different sectors and industries. Global diversification is one of the keys to a well-diversified portfolio. “Investors looking to invest in global mutual funds should look at companies like iShares and Vanguard. In case of investing in stocks, bonds, and ETFs, there are several platforms in the UAE. Swiss Quote, IG, Interactive Brokers, Saxo Bank, for instance, to name a few,” says Downey.
He also suggests comparing the costs before committing to a platform. “I think these platforms generally charge anywhere from $1 to $10 a trade. If you’re an active day trader, then obviously you need a platform that allows low-cost transactions. But if you’re going to be investing maybe once a year or once every six months then it doesn’t really matter in terms of one- or ten-dollar transaction fee.”
If you are looking to invest in global companies, which could include the likes of Google, Apple, Tesla, etc., or get exposure to select markets such as the US, India, China, mutual funds offer a convenient way.
A global diversified equity fund, which falls under active funds, can give you exposure to more companies and also lessen the risks involved. When looking at investing, it is good to be objective. Shed the familiarity bias and go global.
It is important to understand why financial independence is such a big deal and what it is.