A core pillar of our investment philosophy is diversification. And the base of that pillar consists of buying the world. Why?
Some will argue that all you need do is simply buy your home stock market, tracking the FTSE 100 or All-Share indices in the UK, perhaps, or the world’s largest stock market, maybe the S&P 500 index in the United States.
Some might take a perceived long-term view, placing you or your clients into a heavy bias towards the world’s emerging markets. After all, this growth area made up just 3% of the world’s total stock market value not so long ago and now represents around 11% . . . surely the only way is up!?
But would that truly be sufficient diversification? Would it take into account your appetite for risk? Decades of evidence shows that such approaches would be . . . unwise, to put it mildly.
And here’s an example why.
In a land far, far away (well, Canada) there sits the Toronto Stock Exchange (TSE) which is the world’s 12th largest by market ‘cap’ or capitalisation (i.e., the value of all those companies listed on it). As well as being the largest in Canada it’s one of the largest on the North American continent.
A single company, Nortel Networks Corporation, back in the dot-com years of the late 1990s/2000 at one point represented . . . over 30% of the TSE’s entire market cap!
Let that sink in for a moment.
Aside from being the country’s largest listed company, listed on the country’s largest stock exchange founded in the mid-1800s, it represented over a third of one of North America’s largest stock exchanges.
What could go wrong?
It took less than two years for Nortel to fall from those hallowed heights of representing over 30% of the TSE to less than 0.5% of it. That would have been painful for many Canada-only investors, including the so-called great and the good of the Canadian pension fund and investing world.
Nortel filed for bankruptcy ten years ago last month.
When investing, buy the world.