Ten reasons to invest (mostly) in your home country
Saturday, 3 May 2008
Most private investors, and a good many others, invest most of their money in their own country. It is often argued that this misses an opportunity to diversify, and therefore a worse combination of risk and return. So, are investors stupid, or are there good reasons for doing this?
- Investing in equities in your home market hedges against the inflation risk your are exposed to.
- Exchange rate risk. Although I think exchange rate risk is often over stated, it does make the real value of a portfolio more volatile.
- There is plenty of international diversification available in the companies listed in any major market (and a good many minor ones). It is not really necessary to invest in overseas markets directly.
- Access to information is easier. Although the internet has diminished this a great deal, so the continued validity of this argument is questionable.
- Accounting standards and other differences in practices make it harder to assess investments abroad. IFRSs are on the way to solving this, but it is not yet a fully resolved issue.
- Cultural differences can make it harder to understand businesses, when in businesses driven by fashion and the whim of consumers.
- Language barriers can be a problem when investing in some markets.
- Asset allocation can be difficult, because analysing the prospects of different countries requires a different set of skills from the analysis of individual securities and stock-picking.
- The universe of possible buys for bottom-up stock pickers becomes unmanageably large. You are going to need some way of narrowing your choices, so why not do it by sticking to the market that is most convenient.
- The chances of being able to gain information about the reputation of a company within its industry, and similar informal information is much higher if you live in the country where it is either head-quartered or listed.