Global Diversification

1 month ago JCprojectfreedom 0

By investing in assets with lesser correlation, you can reduce volatility to your portfolio with the aim to achieve your target returns. Most of the time, countries’ economic cycles are not synchronized but they could be affected due to other countries’ economic policies. There is an opportunity for investor to construct a globally diversified portfolio.

If I take $10,000 as the starting amount in 1st January 2008, if I buy STI ETF at $3.18, as of 28th October 2018 STI ETF is at $3.02, excluding the dividend payout, the $10,000 will have shrank slightly. Whereas if I have invested $10,000 on S&P500 ETF on 1st January 2008 which is about $1,411 will become $2,658 as of 28th October 2018.

Geographical diversification can do wonders if you place the money in the right country, but will this hypothesis change as the world becomes more integrated than before? If markets are more integrated and correlation increases, the advantage of international risk diversification will be eroded. On the other hand, since countries of the world are developing at different stages, domestic policies and demographics will affect the economy, the markets will be moving in different steps.

JC Project Freedom TUR iShares MSCI Turkey ETF

Turkey TUR Share price was hit badly, there was a drastic free fall for Lira.

JC Project Freedom EEM iShares MSCI Emerging Markets Indx

Just recently, emerging market is badly hit and has corrected by more than 20%.

 

JC Project Freedom EWI ETF iShares MSCI Italy Index

Benefits can be reaped by investing internationally. Short of a country going entirely bankrupt, a rebound will have to happen at certain point. When this happens, the most depressed prices will revert back to the norm. Every year, you can scan all the markets to spot the bad performing countries. The following year, if the country fell again significantly, you can choose to go in after a market has made two consecutive years of bad losses. It is possible for the country to continue to drop further after two consecutive years.

Significant drop is one of the signals investors can use to decide which country to invest money on. This will require an understanding of the economy, was the slump caused by structural issues in economy and government is taking the right actions to correct them, a rebound will likely happen in two to three years after the down fall.