Does the Trump trade, Brexit, and the U.S. Federal Reserve raising interest rates make you wonder if you should stick to your home-country bias? As well, with global economies so interconnected why bother with the merits of global diversification? Are there really benefits to a diversified portfolio?
I would argue diversification still matters. We have all heard the concentration risk on the TSX in terms of exposure to energy, financials and materials and yet it did well last year. However, keep in mind the TSX was in fact the best performing market in 2016 but the worst performing market in 2015. So let’s consider including U.S. exposure according to the MSCI data. Roughly half of all global companies are based outside of the U.S. so the real question becomes: Do you as an investor want to limit your opportunities so significantly?
We have all heard the adage, “Don’t put your eggs in one basket”. Even the best in the industry don’t get it consistently right and it is hard to really know which will be the top performing asset class at any point in time. If I look in the rear view mirror back to 2007 the emerging markets was the place to be, by 2008 it was the absolute worst place to be only to rebound again in 2009. Over the longer term, looking at assets classes, there really isn’t a discernable pattern.
Asset allocation - your mix between stocks, bonds and cash - is what makes diversification work. You don’t want all of your investments moving in the same direction at the same time. Increased globalization and interconnectivity, increased volatility, lower bond yields and potentially lower stock returns all combine to suggest a global portfolio can help to mitigate risk.
Final word, you don’t want your portfolio concentrated in one company, one country, one currency or one sector. The volatility dictates the risk-return tradeoff isn’t worth it.