Geographical Diversification Lessons from Index Investing for Dummies
Get the benefits from a global geographical diversified portfolio of index funds
Once your stock investing portfolio is large enough, you can easily use index funds to diversify your investments over different regions in the world. Such a diversification has a few advantages that we will list below.
Here are four reasons for diversifying your stock investments geographically around the world:
- Different continents show different growth levels.
- The value of your own currency could lower in value compared to other currencies.
- Local disasters could have a large impact on that particular region.
- Geographical diversification offers the portfolio rebalancing opportunity.
The last reason here, rebalancing your portfolio of geographical index funds is addressed in one of our other blog posts.
When to start geographical diversification
My suggestion is to start your geographical diversification when your stock portfolio is more than a few thousand US dollars in value. If your home currency is a major respected currency, I would keep about 50% of your stock investments in your home currency.
In Index Investing for Dummies, you can read something in line with the following recommendation:
“Investors from the US with stock portfolios below $20,000 keep 50% in US stocks and 50% abroad with a single US broad-market index fund combined with a single broad-index international fund.”
I also like to share the following quote from the book:
“… one strong suggestion when it comes to international investing: Go regional, please. Think Europe, Asia and emerging markets as your asset classes – not Belgium, Singapore and Brazil.”
However, I like to make the remark here that some markets, especially China, India and Brazil are probably getting big enough to be seen each as a region in itself.