The importance of thinking global about asset allocation

Before the internet went mainstream, it could be extremely difficult for smaller-scale investors to access international markets at all, especially ones at the greatest distance from their country of domicile.  There were numerous practical barriers in the way, such as the lack of availability of key data and the cumbersome (and expensive) nature of international money transfers.  Now, however, global asset allocation is genuinely available to smaller-scale investors and there are many arguments in favour of taking advantage of it.

Global asset allocation and the principle of diversification Global asset allocation and diversification are basically two sides of the same coin.  Diversification basically means getting the right number of investment eggs in the right basket.  Basically, it’s the art and science of robust asset allocation.  Global asset allocation means exactly that, in other words considering the options available in the whole of the world before deciding which is the right one for you.  For example, you may opt to diversify your assets by dividing them between cash and near-cash, equities and tangible assets  This is your first layer of diversification.  Your second layer of diversification is deciding exactly which of these asset-allocation options to pick.  For example, looking at cash on its own, even if you just want to keep it in an old-school, instant-access savings account, there are still a number of options from which you can choose and if you extend your range of options to the likes of bonds, then there are even more choices available.  Similar comments apply to equities and tangible assets.  Your third layer of diversification is deciding where in the world you wish to hold your choice of assets.  In other words, global asset allocation is used alongside the principle of diversification, rather than separately to it.  For example, you may decide that you would like to have X% of your overall asset portfolio held in bonds and you may then choose to diversify further by purchasing bonds issued in different countries and currencies.

The basics of global asset allocation Just as the stock market contains young start-ups, blue-chip companies and everything in between, so the world contains emerging economies, mature economies and everything in between.  For investment purposes, the difference between emerging economies and mature economies tends to be the extent to which they offer robust protection to investors.  For example, the U.S. is a prime example of a very mature market and its Sarbanes-Oxley Act of 2002 provides stringent auditing and financial regulations, which are backed by a credible enforcement process.  This last point is important, since rules are, effectively, meaningless without credible regulators.  Additionally, emerging markets tend to be growing at a faster pace overall than mature markets.  As is generally the case in life, however, there is a certain degree of nuance to both of these points.  For example, individual companies in emerging markets may deliberately go (well) over and above what is required of them by law, possibly in order to appeal to international investors, while individual companies in mature markets may look to find legal loopholes in regulations designed to protect investors, or they may simply have little interest in whether or not smaller-scale investors are happy with their performance.  On a similar note, while emerging markets as a whole may be experiencing rapid growth (or at least more rapid growth than mature markets), they too can experience periods of stagnation or even recession, while mature markets can be home to investments which offer great prospects for capital growth and/or long-term solid yield, for example, start-up companies or properties in areas with good prospects for growth. For Investments, We Act As Introducers Only