The antidote for these biases is to try to build a diversified portfolio; one that does not over represent your local region or home country. Unfortunately, many investors continue to focus too much of their investment locally, often rationalizing the habit by pointing out that diversification didn’t work so well during the financial crisis.
It’s certainly true that almost every asset class, with the exception of U.S. Treasuries and gold, moved together for a period of time during the last crisis. But that’s the exception that proves the rule. Diversification is not likely to, nor is it intended to, work over short-time periods, particularly when those periods are characterized by a financial crisis.
However, over the long term, all the evidence still suggests that diversification – by asset class, geography, and sector – leads to better portfolios; portfolios that produce better returns per unit of risk.
Getting to that diversified portfolio means embracing other regions and countries, even if they are less familiar and more exotic. This is just one of the reasons I’ve advocated small positions in frontier markets, despite the exotic nature of the asset class. You can read more about my specific country outlooks here.
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.
Source: Bloomberg, BlackRock Investment Strategy Group research