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5 Reasons Your Investments Should be Globally Diversified

"For investment advisors only"

Diversifying your investments globally can potentially reduce your risk and enhance your returns. In fact, global diversification is one of the fundamental tenets of modern portfolio theory, developed by Nobel Prize winning economist, Harry Markowitz. It is a framework for putting together a portfolio of assets in order to maximize expected return for a given level of risk.1

Here are five reasons why your investments should be globally diversified.

 

Access to wider range of investment opportunities

The Canadian market is narrowly focused. It represents only 2.9% of world equity market capitalization2, which means that over 97% of investment opportunities, measured by market capitalization, exist outside of Canada. In addition, stocks on the S&P/TSX Composite Index are heavily concentrated in three sectors – Financials, Energy and Materials –comprising 68% of the index.3

Therefore, when you don’t invest in a globally diversified portfolio, you are missing out on the opportunity to participate in potential global growth opportunities in a range of sectors such as Technology, Healthcare, Telecommunications and Consumer Staples which are underrepresented in the Canadian market.

 

Having your eggs in many different baskets is expected to lower your risks

Global diversification allows you to put your eggs in many different baskets with the expectation to lower your investment risks. You can diversify your portfolio by geography, by sector and by country which may reduce your risks. Typically, the performance of different market sectors and companies in different countries vary over time. Some will make gains while others will make losses. When you hold a diversified portfolio, your gainers and losers are expected to offset each other. Comparatively, if you invest in only a single market, your portfolio is expected to bear the full impact of market gyrations in any given period.

 

Enables investing in uncorrelated assets

The assets in a globally diversified portfolio are typically less correlated because they move in different directions at different times. By investing in a global portfolio which holds assets that are uncorrelated or have a low correlation, your total portfolio is expected to have less risk than the weighted average risk of its parts.

 

Potentially higher risk-adjusted returns

Markowitz demonstrated that a diversified portfolio can potentially provide improved performance and lower your risk versus investing in individual asset. This is why he referred to the benefit of diversification as the only “free lunch” in finance. You can potentially get higher risk adjusted returns by holding a diversified portfolio. Therefore, instead of sticking to investing in Canada and other developed markets, it is important to invest globally. 1

 

Emerging markets an essential component of global diversification

Emerging markets should be an integral component of globally diversified portfolios. They represent a potentially larger and growing investable universe which cannot be ignored in your asset allocation decisions. In 1996, the equity market capitalization of emerging markets was just US$2 trillion making up just 11% of the total global market cap. By 2030, the same is forecast to reach US$111 trillion, accounting for 39% of global equity market capitalization.4

 

1. Financial Analysts Journal Volume 67, Number 3, 2011, CFA Institute

2. Bloomberg, March 2017, “Think Global to Avoid Shrinking U.S. Stock Market”

3. Toronto Stock Exchange Index as of December 15, 2017

4. Credit Suisse – Emerging Capital Markets: Road to 2030. All 2030 figures are Credit Suisse estimates.

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Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.