For years I have been promoting the advantages of global diversification.
My recommended portfolio
Generally, I recommend a portfolio of ⅓ Canadian, ⅓ US, and ⅓ international stocks. I claim that different countries run at different economic cycles, this means that as some countries’ economies are growing other countries’ economies are shrinking.
Avoiding home bias
The advantages of having a diversified portfolio of different geographical areas is that we can reduce home bias ( the tendency to buy stocks from your home country). For example the Canadian economy is only 2% of the global economy, it makes no sense to have a portfolio of only Canadian companies.
Does it work?
It is believed that having investments from different countries, decreases overall risk and increases long term returns. But is this true?
It has been my observation that in time of crisis, most markets are highly correlated, they behave in unison, thus rendering diversification useless. At the exact moment when you need that benefits of diversification the most, it’s the moment when you can’t have it. At any other time, global diversification in a nice academic theory.
It doesn’t work when you need it the most
Two examples come to mind. The time when the Greek government almost defaulted on their debt. At that time all the international markets were moving in unison, they were tanking. The other example was the financial crisis of 2008. All the international markets went down at the same time.
Global investing is an idea that it’s nice in the textbooks but almost useless in real life. Yes, as the textbooks tells us. If we invest over a 20 year period or longer, our investments line are smoother when we are properly diversified. But as investors, will we have the stomach to see all our national and international investments tumble at the same time?
Lack of better ideas
In spite of all of its shortcomings, I will still champion my ⅓, ⅓, ⅓ portfolio of Canadian, US, and International ETFs. Not because I am a strong believer, but because I lack any better ideas.