This morning while cycling to the library, I was listening to a podcast of Money Box, a BBC radio show. This particular show was about investment advice and the whole panel recommended to split your investments in equities (shares or stocks) at around 50 to 50 between the UK and the rest of the world.
I was puzzled and I disagree profoundly:
First of all, I don’t see any reason why the UK economy or stock market should outperform the economies of other countries that have a stronger industry, more
resources or other competitive advantages. But I don’t want to make this post about the merits of the UK economy and would instead prefer to raise the issue of geographical diversification:
Not only does the UK account for much less than 50 % of the world economy (were some panelists stuck in the days of the Empire?), but I think it is wise to invest as little as possible in your own country.
The reason for this is not any lack of patriotism, but risk diversification. The economy of the country in which you live already affects you every day. If it is booming, you will find a better job or get a pay rise, your business will have more turnover and profits, your cash reserves will grow in exchange rate value and you will be able to afford more holidays. If on the other hand your home economy is in a recession, you might lose your job or you will have fewer clients if you are self-employed. These fewer clients will also pay less and later.
Why would you want to put all eggs into one basket just because you were born in that basket or happen to live there? It’s smarter to profit from other economies’ growth while your country is going slow, and to gobble up cheap investments abroad while your country is booming. If you argue that most economies undergo the cycles of boom and bust
together at the same time, then this is still no argument why you prefer your own country disproportionately.
I can see that for UK investors this strategy involves the risk of exchange rate fluctuations because they cannot buy anything anywhere in the world for British Pounds, but that’s just another argument for joining the Euro.