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What does 2023 hold for the global stock market?

Investing Abroad: How To Diversify Your Portfolio And Mitigate Risks

By David Pritchard

 

If you have been following our previous blogs and podcasts, you’d have probably heard us talk a lot about portfolio diversification. But what exactly does this mean?

What we find amongst many DIY investors is that they tend to do one (or both) of two things. They either buy a few direct shares – which doesn’t generate sufficient diversification – or focus the entirety of their portfolio within the UK.

Neither of these are profitable options. So, how do you maximise your investment opportunities to mitigate risk and increase profit?

Understanding the global markets is the first step.

Investment opportunities around the world

Currently, there are some major opportunities around the world that investors can take advantage of. And of course, America sits comfortably on this list.

The American stock market is the largest in the world and, as they say, when America sneezes, the rest of the world catches a cold. This means that the performance of the American stock market has a ripple effect on other markets worldwide – including here in the UK.

We also have the Far East – India, Taiwan, and South Korea – all of which have growing economies and technologies. And of course, there’s the behemoth: China.

All of these geographical areas present huge opportunities for investors. But as always, it’s important to approach your investment decisions carefully, and with the guidance of an independent financial adviser.

Diversifying your portfolio

Diversification, in geographical terms, means having funds invested in different parts of the world. This helps to mitigate risks in some respects and can open up opportunities.

Take the UK for example. At the moment, we’re experiencing relatively slower growth compared to other nations in the G7 and the G20. The economy is certainly stickier as a result of inflation and rising interest rates.

Given these circumstances, it can be highly advantageous to diversify your portfolio by including investments in overseas markets. This can provide significant benefits and help to counterbalance the risks associated with the domestic economy.

How to invest abroad

When clients invest abroad, they typically do it through a fund. Investors prefer this approach because buying individual shares can be challenging, time-consuming, and often expensive. Moreover, investing in a single share carries greater risk because if the company goes bust, you may lose all or a significant portion of your investment.

Some international funds invest globally, while others focus on specific areas such as an American big blue-chip fund or a European fund. The advantage of this approach is that different countries may present unique opportunities at different times. That’s why you need to find the right fund manager with proper insights into the market.

How international fund managers work

Most fund managers tend to work one of two ways. They either create a geographical allocation and pick stocks accordingly, or they take a bottom-up approach and invest in the best stocks (wherever they may be in the world).

Both of these approaches are viable but in our experience, the more focused, bottom-up funds tend to have a much better performance.

Hedging your investments

In terms of an overall portfolio structure, investing overseas carries more risk compared to investing solely in the UK. Whilst the UK market presents the risk of share volatility, investing abroad introduces an additional risk: currency fluctuations.

Regardless of where you have invested, you still have to convert the currency back into pound sterling to get the true value of your investment. So, if the currency exchange rate is unfavourable, you might make money on the share price, but lose it when converting the funds.

To mitigate this risk, most fund managers employ a strategy called hedging. They make informed predictions on the direction of the exchange rate for a particular currency. Then they purchase an insurance policy to protect the fund against adverse movements in those rates.

Although fund managers may not always accurately predict currency movements, the hedging process does help to mitigate some of the risks associated with individual currency exchanges.

The bottom line 

Ultimately, we believe that clients should prioritise geographical diversification and invest with reputable fund managers. However, it’s equally crucial to regularly review your portfolio and stay informed about global events that can impact investments.

Don’t rely on a single strategy or fund – these have proven to be unreliable for many investors.

For more useful advice on how to diversify your portfolio and invest abroad, listen to our podcast, A Dab Of Investment.

And if you’d welcome our input, expertise and experience, please get in touch by emailing me at david@applewoodindependent.co.uk.

The views expressed in this article are those of the author and do not constitute financial advice. Applewood Independent Ltd is authorised and regulated by the Financial Conduct Authority. For financial advice designed for you and your specific circumstances, please contact the author using the contact details provided in this article or, alternatively, contact the Applewood Independent Ltd office on 01270 626555.

The value of your investment can go down as well as up, and you may not get back the full amount invested.

Past performance is not a guide to future performance.