Sound investing: Why diversification is important

When it comes to building a resilient investment portfolio, diversification emerges as a fundamental strategy that investors should embrace. While supporting local businesses is admirable, achieving a balanced, risk-adjusted portfolio requires a broader perspective that encompasses international investments. South Africa constitutes less than 1% of the global economy. By investing globally, you gain access to sectors and industries that may not be readily available in the local market.

And thanks to our increasingly interconnected world, technology has made it easier than ever to explore global investment opportunities from the comfort of your home.

However, before diving into international investments, it’s crucial to conduct thorough research, assess your investment goals, evaluate risk tolerance, and seek professional advice. With these steps in place, a well-diversified approach can help navigate the complexities of international investing and maximise potential returns while managing associated risks. 

Here’s why diversification is essential for sound investing:

Exposure to different economies: Investing internationally provides exposure to diverse economies and assets, broadening your investment horizon and potentially enhancing wealth.

Diversification for risk mitigation: Diversifying across different securities, industries, and countries helps minimise risk. Poor performance in one market has less impact on your overall portfolio.

Access to high-growth markets: Emerging markets offer significant growth potential, driven by increasing consumer spending and technological advancements.

Portfolio protection: International investments can protect your portfolio from domestic political and economic risks, offering stability in times of uncertainty.

Cons of international investments:

Currency risk: Currency fluctuations can affect the value of your investments when converted back to the local currency.

Taxation complexity: International investments may involve complex tax rules, requiring guidance from tax professionals.

Market and political risks: Different market risks, geopolitical tensions, and regulatory changes must be considered when investing internationally.

Higher transaction costs: International investments often come with higher transaction costs, including currency conversion, fees, and compliance expenses.

How to invest in global markets:

Navigating international markets can be complex, given varying rules and regulations. It’s essential to do thorough research, seek professional advice, and be selective in portfolio construction. An experienced investment advisor can help tailor an investment plan to your specific needs and goals.

Investing globally is not a quick way to make money; it’s a medium- to long-term endeavour. It may take five to ten years or more to fully realise the benefits of a global investment strategy.

With careful research, professional advice, and a long-term perspective, international investments can play a vital role in achieving your financial goals.

While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither the writers of the articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein.  Our material is for informational purposes.