Long-term investors of all stripes tend to have one key weakness. Obviously, there are opportunities to add stocks to your portfolio. But it should also be a chance to view how you allocate your positions as well.
Clearly, allocation can come in many forms. This is either in the amount of money you have in particular stocks or it can also mean in terms of how much you have in certain asset classes.
In stock investing, though, there’s one key way I feel investors should be approaching diversification. It’s by geography, and I’ll explain why.
Home bias
All investors possess what is called “home bias”. We tend to be most comfortable investing in stocks in our own home market. The upshot of this is that we, by design or not, can end up having all our money in one stock market.
That’s a massive risk. If you’re an objective observer it doesn’t make much sense to put all your eggs in one basket. Yes, investors may actually buy their home market and the US as well. That does make sense.
Why? Well, for an investor to not have holdings in the US stock market is to miss out on a large part of the world’s market capitalisation.
According to most estimates, US stocks accounted for over 40% of the world’s total market capitalization – basically the value of all listed stocks combined.
That share has surely has probably increased (or stayed constant) given US stock markets have gained strongly after falling in the first part of 2020.
However, the lesson remains the same. If you’re not invested in US stocks, you are missing out on a large chunk of the world’s stock market potential.
Smarter strategy
Yet I don’t believe this goes far enough. For investors in this modern era, an allocation to China stocks is also a must-have. Usually, this means buying Hong Kong-listed stocks.
And for investors residing in Singapore, a stock allocation that splits between Singapore, the US and China is a good idea.
For any investor, having exposure to China is a no-brainer. But, I don’t buy into the idea that owning a US company with sizeable “China exposure” is a sufficient play.
As we have seen recently, a lot of US-listed companies that have significant China revenue exposure are at significant risk of rising US-China tensions.
Beyond that, some of the most innovative companies are now coming out of China. Investors should therefore be finding how they can buy into these long-term growth stories.
Comprehensive geographic diversification
For investors who are just starting out, or those who may not have exposure to multiple markets, now may be a good time to start.
China’s economy is one of the few major economies that’s returning to growth, after being one of the first countries to go through Covid-19.
Meanwhile, the US economy is clearly suffering but that hasn’t translated into poor stock market returns.
In fact, 2020 has been a solid year so far for both the S&P 500 and Nasdaq indices, mainly due to the technology sector.
Any way we look at it, hedging our investments by being invested in stocks in multiple countries is a great starting point for our long-term investing journey.
