The importance of diversifying your assets globally

By Sam Whybrow, Lubbock Fine Wealth Management LLP

Investing in a broad range of countries expands the potential opportunities available to you and can help to reduce the overall risk of your portfolio. It is therefore vitally important to globally diversify your assets and is a major factor that we focus on when we construct investment portfolios for our clients. It is always a good idea to review the positive effect that global diversification can have on a portfolio: last year, like most years, highlights why.

In 2014, the UK market was one of the strongest in the developed world but returned just 0.50 % compared to the globally-diversified developed world index which returned 12.1% [1].

The media tend to over dramatise the effect of world events on stock market returns as they are usually out of context and provide little perspective. For differing reasons, Russia and Greece were last year’s headline-makers and triggered some anxiety for investors. The Russian market fell by 42.5% and Greece by 36.2%. Indeed, Greece is still causing a lot of worry for investors.

It is interesting to note that neither of these market falls had a significant effect on the total performance of a globally diversified portfolio, as both markets are fairly small. Media hyperbole will not provide context: for example, Apple, the world’s most valuable listed company, is worth more than three times Russia and Greece combined. This puts the fall in Russian and Greek markets into far greater perspective. Is holding Russian and Greek stocks more or less risky than owning Apple shares? Investing sensibly means global diversification, in countries, stocks and also bonds. 

So which countries should you consider investing in? The answer is simple: all of them, or certainly as many as reasonably possible. This is because it is impossible to predict which will do the best or worst over any given period of time. A concentrated portfolio, by definition, means it is speculative and therefore increases the chances of investment success but likewise also the chances of failure.

Who would have predicted that Denmark would have been the best performing developed market over the past 20 years? The Danish market, some 0.5% of the global market, returned an average of 12.3% pa compared to the developed market average of 7.6%.

 “The Randomness of Returns” chart below illustrates this perfectly. It ranks historical annual stock market performance in GBP for different developed and emerging markets, from highest to lowest in each year. Each colour relates to a different country and, as you can see, the scattered spread of colours demonstrates that there is no predictable pattern in any market.

As an investor, if you had followed a disciplined and diversified strategy, you would have been more likely to capture returns whenever or wherever they occurred in any given year, without having to attempt to predict the future. A globally diversified strategy like this also reduces investment risk as you are unlikely to be invested in any one country, stock or bond that significantly underperforms in any one year.

Source: MSCI developed markets country indices (net dividends) with at least 25 years of data. MSCI data copyright MSCI 2015, all rights reserved.

For further information on diversifying your investments or for a free initial chat about how Lubbock Fine Wealth Management could help you, please email me or call on 020 7490 7766.

[1] All data sourced from Dimensional’s Matrix Book, 2015, and Dimensional’s returns programme

Lubbock Fine Wealth Management LLP is an appointed representative of Financial Limited (http://www.financial.ltd.uk/), which is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales, Company Number: OC310826, Registered Address: Paternoster House, 65 St Paul's Churchyard, London EC4M 8AB.

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