Geography As an Investment Consideration
The credit crisis that surfaced in mid-2007 and eroded much of the equity values throughout the rest of the year and into the first quarter of 2009 sent a message to the world of investors: stay away from US stocks, stay out of China equities and start pulling out of Latin American markets. As an investors, where does one find the best way to invest their hard-earned money in world equities? After all, domestic equities provide a very narrow range of opportunities, particularly with the debt being taken on the by government, the slow economic recovery predicted for the States, not to mention all of that financial reform that is currently underway.
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In some countries, economic recovery will happen slower (not so good to invest there, obviously) than the United States. And in others, this recovery will happen a lot quicker and with a lot more vigor. One such country, of course, is expected to be China with its large population, growing middle-class and wealth base. That often leads investors to other countries with a large population and growing demand for “middle class stuff,” and those countries would include the Latin American countries as well as India and a few others where demand for global products is expected to only get stronger, not weaker.
The point of course is that geography plays an important role when investors put together their investment portfolios. This raises the question about top-down or bottom-up investment analysis, one that is not easily answered because investments in companies should not be made purely on their geographic location.
One way to properly diversify is to find core investment holdings for the proper percentage amount of your portfolio. As these holdings are secured (assuming a buy-and-hold strategy is being used) then investigating other countries of interest, first for its economic strengths and weakness and then, by creating a short-list of industries or sectors, by potential company. An easier way to properly diversify by geography is through straight ETF investments or, for someone who wants to have a hands-off relationship with their non-domestic/core investments, through global or region-specific mutual funds. Regardless of which avenue (ETF or mutual fund) the decision is a lot easier to make.
In summary, whether you choose your own foreign holdings or hire a fund manager to do so for you, geographic diversification is important to the long-term success of your investment portfolio.