This is the fourth in a series of articles looking at some of the key issues for successful cross-border investing and helping international investors secure their financial future.
In the previous articles, you read about:
- Why embracing market volatility is one of the best ways to achieve long-term investment success
- The importance of staying invested rather than continually trying to time the market
- How a long-term investment strategy can help protect you from the effects of inflation or a recession
This month, you can read about the importance of diversity and why it’s wise to invest across all market sectors, not just one.
This article draws on data and insights from Dimensional, a globally respected investment firm and one of our trusted fund management partners, whose strategies many of our clients invest in.
Investment diversity can help mitigate the effect of market fluctuation
In a nutshell, investment diversity is all about not putting all your eggs in one basket.
If you limit your investment choice to one or two stocks, or companies in a single index, you could risk a market downturn seriously affecting your portfolio.
Instead, you can mitigate the risk of market fluctuation threatening your long-term financial security by investing in a range of assets in different industries and geographic locations.
Take a look at these three charts and discover why diversifying your investments across different regions and sectors is so important to your long-term financial success.
1. The randomness of global stock market returns
Source: Dimensional
This chart shows the comparative annual returns for developed markets from 2005 to 2024, covering 20 years of data across 22 markets, sorted from highest to lowest performance.
The scattered colours suggest that it is difficult to predict future returns by looking at the past.
New Zealand, for example, posted the highest market return in 2019 but the lowest in 2021. Similarly, Canada showed the lowest returns in 2015 and then the highest just a year later.
A diverse global portfolio investing in markets around the world can result in a more consistent experience, with higher returns in one market helping offset lower returns elsewhere.
2. Here’s why you should invest in all the sectors, not just one or two
Source: Dimensional
Sectors represent groups of companies that make similar products or offer comparable services.
The chart illustrates the challenge of trying to pick “hot” sectors in advance. From 2015 to 2024, no sector was a consistent outperformer.
- Energy, the best performer in 2016, 2021, and 2022, delivered the worst annual returns six times.
- Technology, the leader in 2023, finished ninth out of 11 in 2022.
- Healthcare finished first in 2015, last in 2016, and first again in 2018.
The absence of a reliable pattern in sector performance supports an “own them all” approach.
Holding stocks across all sectors puts you in a position to capture higher returns where and when they appear.
3. Global diversification can make a world of difference
This chart illustrates the percentage of world equity market capitalisation as of 31 December 2024.
Source: Dimensional
This chart reinforces the message from the first graph: that ignoring global investments could result in you missing out on a wealth of opportunity.
It also highlights the importance of avoiding being overweight in stocks from your own country – commonly known as “home bias”.
For example, stocks of the roughly 20,400 companies trading outside the UK represent more than 96% of the world’s £64 trillion equity market.
Likewise, Australia makes up only 2% of the world’s markets.
When determining where to invest, a country’s size may not be a primary consideration. Japan, for instance, is relatively small but accounts for 5% of the world’s equity market value.
Global diversification captures returns from companies around the world and can potentially offset a weak market with stronger returns elsewhere.
Investing globally can deliver more reliable outcomes over time.
Get in touch
Expert advice and regular reviews of your investment strategy can help ensure that you are best positioned to achieve your long-term goals.
At bdhSterling, we specialise in helping clients navigate the complexities of international financial planning. Whether you’re managing assets in multiple countries or planning a move abroad, our expert advisers can help you build a resilient, long-term investment strategy.
If you would like to discuss your own investments, please get in touch with us today.
Please note
This article is for information only, it does not take into account your personal objectives, financial situation, or needs.
Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.