The Motley Fool

1 Method to Instantly Diversify When Stock Investing

Investors in this coronavirus-induced bear market should be taking it as an opportunity. Obviously, there are opportunities to add stocks to your portfolio. But it should also be a chance to view how you allocate your positions as well.

Clearly, allocation can come in many forms. This is either in the amount of money you have in particular stocks or it can also mean in terms of how much you have in certain asset classes. Those are just two examples.

However, for the sake of this piece, I’ll look at how I view diversification in the stock market. There’s one way I feel investors should be approaching diversification in stocks. It’s by geography, and I’ll explain why.

Home bias

All investors possess what is called “home bias”. They are comfortable investing in stocks in their own home market and, thus, have all their money in that market.

However, if you’re an objective observer it doesn’t make much sense to put all your eggs in one basket. Yes, investors may actually buy their home market and the US as well. That does make sense.

For an investor to not have holdings in the US stock market is to miss out on a large part of the world’s market capitalisation.

According to estimates, US stocks accounted for over 40% of the world’s total market capitalisation.

That has surely come down a little (or stayed constant) given global stock markets have fallen in tandem recently.

However, the lesson remains the same. If you’re not invested in US stocks, you are missing out on a large chunk of the world’s stock market and stocks.

Smarter strategy

Yet I don’t believe this goes far enough. For investors in this modern era, an allocation to China stocks is also a must-have.

And for investors residing in Hong Kong (where the majority of the local stock market is China stocks), an allocation that splits your holdings between China, the US, and a third market is a good idea.

For any investor, having exposure to China is a no-brainer. But, I don’t buy into the idea that owning a US company with sizeable “China exposure” is a sufficient play.

Some of the most innovative companies are now coming out of China. Investors should, therefore, be finding out how they can buy into these long-term growth stories.

Comprehensive geographic diversification

For investors who are just starting out, or those who may not have exposure to multiple markets, now may be a good time to start.

China’s economy is now returning to work, after the country dealt with an onslaught of Covid-19 infections. Meanwhile, the US and Europe is just at the start of seeing a spike of coronavirus cases within communities.

Hedging our investments by being invested in stocks in multiple countries is a good point to start.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.