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Most investors whom I met tend to have one thing in common. We tend to invest locally. This means that we have a natural tendency to invest in a stock that is listed on our country’s stock exchange or operates locally.
As we are starting out in investing, restricting ourselves to just investing locally is a great way to get ourselves familiar with the stock market. However, I do think that as we become more comfortable in managing our own portfolio, we should consider diversifying our portfolio internationally. That is because restricting ourselves to our home market can be riskier than you might think. Here’s why:
- The Illusion of Control
I remembered once when I have only been investing in the market for 3 to 4 years, a friend came up to me to encourage me to invest in a small healthcare company listed on the local exchange. I have read about the company on the news as it saw a huge drop in its share price due to news about it having some cash flow challenges.
My friend was extremely positive about the company, telling me that was because he went to the same Church as the Chairman of the company. And the Chairman has explained to him that the reported cash flow issues will be resolved soon.
I didn’t invest in the company as its financials at the time was extremely problematic but I was pretty sure my friend did, and maybe by a large amount.
Six months down the road, the company went into bankruptcy and has to be restructured. I believed that the Chairman did not lie to my friend as he could be genuinely trying to solve the issue at the time. However, there are things even beyond the control of a Chairman.
We have a tendency to feel that we are more in control of an investment when we know someone in the company or the board members seem friendly during the Annual General Meeting (AGM) or the company is founded in our hometown. However, it is important to know that just because we have a personal connection with a company, it does not necessarily make it a great investment.
Wouldn’t investing in world-class companies like Apple Inc (NASDAQ:AAPL), Amazon.com Inc (NASDAQ:AMZN) or even Procter & Gamble Company (NYSE:PG) be safer than investing in a small healthcare company in your hometown even though these Multi-national companies are not listed in your home exchange?
- Concentrated Risk
Investment should be used to spread our risk. Apart from just risks linked to our stocks, it also includes risks associated with our work and our lives as well. For example, if you happened to be working for Starhub Limited (SGX:CC3) in Singapore and you invested most of your savings into Starhub, will that be a wise decision?
We are already working in the company and having our livelihood in Singapore. When an economic downturn occurs here, we could end up losing our jobs and needing to live on our investment for a period of time. Yet, if our investment is also tied to our work, it means we could lose our jobs and see our investment drastically declined in value at the same time.
If we keep all our eggs in one basket, when that basket drops, all the eggs will be gone.
A diversified portfolio could help us mitigate some of these risks.
- More Growth Opportunities
There is a reason why most of the largest companies in the world are located in populated and powerful countries like the USA and China. The simple truth is that the market size is significantly larger for these companies to grow. For us, unless we are looking purely at export companies, there is a limitation to how big a company can grow here.
With the world becoming more globalised, it is also much harder for our local companies to compete with the international giants. For example, retailers like Sheng Siong Group Ltd (SGX:OV8) and Dairy Farm International (SGX:D01) have been serving us for generations. Yet, within a short period of time, we have seen international retailers, with their almost limitless funds, such as Amazon.com Inc (NASDAQ:AMZN) and Alibaba Group (NYSE:BABA) enter the market aggressively.
Moreover, many of these international companies have common products and services that we used every day. Services such as Facebook, Whatsapp and Instagram are all owned by Facebook Inc. (NASDAQ:FB). YouTube is owned by Alphabet Inc, the parent company of Google (NASDAQ:GOOGL) and Netflix (NASDAQ:NFLX) is the reason why many of us are no longer watching Cable Television from Starhub Limited (SGX:CC3).
The Easiest and Cheapest Way To Diversify
And the stock market is one of the asset classes that we can achieve portfolio growth with just a click on a mouse. Moreover, the cost to invest in these international market is now as cheap as investing locally.
FSMOne.com, an integrated wealth management investment platform which is the Business-to-Consumer (B2C) division of iFAST Corporation Limited (SGX:AIY), now offers one of the lowest brokerage charges in Singapore for you to invest internationally.
Source: FSMOne.com Pricing Website (https://secure.fundsupermart.com/fsm/new-to-fsm/pricing-structure)
You can also find a full suite of thematic portfolios available for investors who are keen to invest into specific themes such as, Income Focus or Value Focus. Besides that, you can also invest in companies listed on Hong Kong Stock Exchange (HKEX) or the US (NASDAQ, NYSE, NYSE American, NYSE Arca) at 0.08%, subject to the minimum investment amount of HK$50 and US$8.80 respectively.
You can view all your investment holdings in one place and be able to invest in Unit Trusts, Bonds (Wholesale/Retail) and FSM Managed Portfolios (FSM MAPS) directly from your FSMOne account as well.
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