As globetrotters, we understand the importance and embrace the idea of investing ourselves around the world. We pour our human capital in a foreign economy, earn a foreign currency, pay into a foreign pension, and volunteer our time in a local community. Compared to those who stay in their home country, we might have the least bias toward actually investing our savings in foreign markets.
But having the experience of living in multiple countries doesn’t necessarily give us insight into how to invest globally. In fact, we might get carried away from investing prudently due to false familiarity or negative experiences we have in any given country. In addition, we face more complications from entanglements with multiple financial systems and laws. It can be difficult to pinpoint where our financial interests lay.
So let’s take a step back and think about what investment means. As discussed in a previous post, we are contributing our excess to further the growth of the world economy, and taking a risk on the companies’ ability to do so. Some companies may succeed and some may fail, but overall we hope by pooling our resources together, we can advance the welfare of the human race. This process is not limited to whichever country you are from or live in. We are investing into the global economy, so it’s only natural that we don’t limit our investments in one country.
What’s the best way to invest globally then? It depends on your investment philosophy. If you have the skills, information, access, and conviction to pick the companies that can give you superior returns, then it doesn’t matter where the companies are located. You should find the ones that have the most growth potential and value in the long-term anywhere around the world and invest in them.
However, most people don’t have the skills, information, access, and conviction to continuously invest in the right companies anywhere in the world. In this case, the best way to take the risk on your savings for the betterment of humanity might be global diversification based on the share of each country’s market and economy. Effectively, you own a piece of the world market. There will be periods where the global economy collectively goes down, like in 2008; but the hope is that in your lifetime, the global economy will track toward the right trajectory, like the progress we’ve enjoyed from the end of World War II until now.
In practice, you may be able to use a total world stock ETF to achieve global diversification. These funds usually track an index that is weighted across all the tradable markets in the world, and represents the current global market composition. They keep track of the changes in each country’s weight in the global market for you. On the flip side, however, you are unable to “bet” on any certain countries to grow faster than the others in the future. You are truly “locked-in” with the world economy as it is now, for better or for worse.
In case you are interested, Bank of America Merrill Lynch recently published a map that shows the latest free-float equity market capitalization as measured by MSCI. You’ll see that a country may have large landmass, but not necessary a sizable share of the world economy, or tradable market.
For more flexibility, you may choose to construct your own globally diversified portfolio using individual index funds that represent a country or a region according to your expectation of what the future world economy composition might look like. For example, even though India is a relatively small share of the world economy now, with favorable demographics, you may expect its economy and market to grow faster than the other and choose to invest more of your portfolio there. This is a type of “Tactical Asset Allocation.”
If all this sounds kind of risky to you, it’s because it is. We do want the world economy to continue to grow and transform, but it’s not going to be a smooth path, and it is still a possibility that we are all doomed in the end. If you are not able to stomach this type of risk, either financially or emotionally, you need to reconsider your asset allocation. But if you are aiming to contribute and participate in the growth of the world (and your savings), investing global equity is the way to go.
Lastly, no matter how you invest globally, it is first and foremost important to identify the “growth” portion of your saving that you can afford to take some risks in. As discussed, investing in global stock markets exposes you to more swing in the price of your investment. You should also expect to be in it for the long-term to capture the growth, especially if you go the passively diversified route. For globetrotters, this should be considered in conjunction with your (current or retirement) income, the currency of your income, where you live, and the cost of investing from where you live. Remember, everyone’s situation will be different, so find someone who is able to give you customized advice if you don’t feel comfortable doing it yourself.
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