“By definition, index funds provide the most diversification in each asset class and eliminate all uncompensated risk. In contrast, active fund managers rely on less diversification to beat the index. The managers either limit their holdings to a few favorable securities or they avoid unfavorable sectors.” – Rick Ferri, The Power of Passive Investing.
The concept of diversification is certainly nothing new when it comes to investing, actually, I wrote about it recently here discussing some of my favourite international equity Exchange Traded Funds (ETFs) for your portfolio.
Diversification is good for your portfolio for many reasons:
- It helps manage risk; while diversification across asset classes, sectors and markets cannot prevent investment losses, it can definitely help mitigate a catastrophic one.
- Putting all your proverbial eggs in one basket is risky; spreading investments across multiple unrelated products can help your portfolio benefit from “winners” over temporary “losers”.
- Risk is largely a function of market and major economic trends, so there is no way an investor can reduce the risk by owning just a few securities themselves.
On this last point, the more I think about the structure of my own portfolio, the more diversified I need to be. While Canada is a big country geographically, on the world economic stage, it’s a very small player. If you’re going to be a successful investor you need to think and act globally. What I mean is, don’t be a homer, invest in foreign lands.
For starters, look to emerging markets for some help with these products for consideration:
VWO:US – Vanguard’s FTSE Emerging Markets ETF seeks to invest in stocks of companies located in emerging markets around the world, such as China, Brazil, and South Africa. The MER is 0.18%.
VEA:US – Vanguard’s FTSE Developed Markets ETF seeks to track the investment performance of the FSTE Develop Market index, ex-North America. The MER is 0.10%.
VXUS:US – Another Vanguard product, the Total International Stock ETF gives investors broad exposure to major stock markets around the world, ex-United States; it holds over 5,700 companies from many countries.
Looking beyond emerging markets, considering looking at countries like Australia. Like Canada, Australia’s economy is on fairly firm ground thanks to a stable political and banking system, and is close to some of the fastest growing aforementioned emerging markets in the world. Like Canada, although investing in Australia has risks; with its high dependence on energy and commodities to keep things humming along, there are some stocks and ETFs worth considering. Here are a few:
EWA:US – an iShares MSCI Australia Index Fund ETF. This product gives you some exposure to some of the largest stocks in Australia, and sports a modest management fee to do so at around 0.50%.
If you want to be more aggressive with your investing selections, you can consider these companies from Australia as an American Depository Shares (ADS):
- BHP Billiton Ltd. (BHP:US)
- National Australia Bank (NABZY:US)
- CSL Ltd. (CMXHY:US)
Although these Australian stocks do trade on the NYSE, most don’t, the global investor could open an etrade account here if you’re looking at Australian companies in particular. On a related note, you can find an interesting list of country-specific ETFs in Larry MacDonald’s article here. Who knew beyond owing an entire country like Australia you could own more countries like India (ETF via ZID) and Mexico (ETF via EWW) so easily?
What’s your take on diversification and investing in foreign lands? Is this essential for investing success or is it overrated?
