How do you go about achieving your financial goals in an ever-changing world? How do stock markets work? Why own bonds? These days, it’s not enough to mind your money. You want to mind your money so it matters: to you and to your family, on your own terms and, most importantly, in your best financial interests. To help with that, we bring you Nancy Graham’s “Minding Your Money Matters,” thoughtful financial advocacy that you can readily apply to your financial life.
Among our goals in “Minding Your Money Matters” is to challenge common financial assumptions that threaten to lead you astray. Today, we’ll take a look at global diversification.
How do you think about your own investing? When you hear of troubling or encouraging current events, are you tempted to move your money around in reaction? When you view the world not according to land mass, but by the size of each country’s stock market relative to the world’s total markets, a number of helpful concepts come to life.
About 37.5 trillion to one. The total value of the world market was $37.5 trillion as of December 31, 2012. If you try to beat the world market by picking stocks that you or your broker feel are over- or underpriced, you’re betting that you can make consistently better choices than the collective wisdom of tens of trillions of other shareholders’ dollars. That’s a tall order, if you ask us.
Instead of trying to outsmart the market’s complex network of human enterprise, behavior and wisdom, we believe the better course is to cost-effectively spread your investments around the world, to capture the wealth that this collective, worldwide wisdom is expected to generate.
Many investors feel good about investing at home. If all of your stock holdings are Canadian, you are exposed to a mere 4 percent of total available market opportunities. By adding a stake in the U.S. market proportional to its global presence, your exposure jumps to nearly half of the world market. One more step to the rest of the developed markets – such as Europe, Asia, Australia, provides access to capitalism around the world. The point isn’t to concentrate your holdings in one country or another, but to capture true diversification looks like, based on various countries’ actual market presences. For all the news in China, for example, its global market presence is actually only about half that of Canada’s.
Map your portfolio against this map and see how well positioned you are to benefit from the market’s wealth creation.
