If you are investing in Indian stocks and assets, you might as well expand internationally. For three reasons: the prudence of forex diversification, participation in the growth story of markets, and a more lucrative outlook for your portfolio. Let’s see why it’s important in more detail.
Reasons why you should invest across borders:
- Currency diversification
A truly balanced portfolio of Indian and international stocks over the long-term has proven better risk-adjusted returns with lower volatility. Currency diversification can be influenced by your lifestyle and financial goals. Here’s how you do it. Understand the currencies that you’re exposed to and the ones that align with your habits and goals. Eg. You may be traveling frequently or looking to plan for your child’s overseas education. You may look to diversify based on factors like outlook of various assets like equity, real-estate, bonds, commodities, etc; outlook of currencies, and how complementary it is with your current portfolio. Then decide what makes sense for you.
- The benefits of stocks in Global Markets
You can have access to global MNCs in sectors that are not represented in Indian exchanges. Eg. The US stock market is home to some of the most desirable stocks in the world like Facebook, Google, Apple, etc; which opens up a more diversified investment avenue. One has the option of participating in global innovation and other themes from time to time.
- More options
Going beyond the US, you’ll find that different currencies and stocks perform differently at different times. Acquaint yourself with the indices, trends, and dynamics. Developed and emerging markets respond differently to economic turns. While many markets took a plunge, some recovered faster than others. For example, Libyan oil market was looking hopeful (subject to political volatility) and the Australian stock market saw a boom before the Wall Street sugar high in November.
Furthermore, it strengthens your portfolio, offers a wider horizon, helps manage risk better and can potentially enhance returns.
It’s only fair if we discussed the downsides as well. Investing is tricky. Investing in multiple markets internationally gets trickier and more complex. Moreover, something that’s in hype currently may lose its momentum, and even deliver negative returns in the future. Before you head out there, ask yourself the following questions.
- Does this align with my personal goals?
- Which markets suit my lifestyle?
- Can my wealth manager or myself track this investment decision with due diligence?
- Am I aware of nuances like currency dynamics, trends, geopolitical correlations, etc?
Making the most of your global portfolio.
If you’re still contemplating your options, here’s a mental model to help you decide which assets and stocks will pay off for you. It’s called Warren Buffett’s “20-Slot” Rule.
In a lecture at a B-School he said,
“I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches—representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all.”
It’s quite evident that the winners usually are very selective. Selective focus helps you trim away good options and make room for great decisions. And, you can always consult a professional who has experience in global markets and whom you can trust when in doubt.