Why Bother With Global Stocks
It is better to be roughly right than precisely wrong.
Investopedia defines ‘Home Bias’ as the tendency for investors to invest the majority of their portfolio in domestic equities, ignoring the benefits of diversifying into foreign ones. This is true for many investors around the world. Singaporeans feel comfortable when buying local companies like SingTel, SIA, DBS and Sembcorp. After all, we walk past the buildings these companies own, using their services as their vehicles whizz past.
However, putting too much of your money into homegrown companies doesn’t pay off all the time. Diversification is a common word in investing. Whether referring to individual stock positions, sectors, industries, asset classes, or regions, the logic remains the same. By spreading your investments among more components, your returns become less reliant on any single investment; this reduces risk in your portfolio. Much like the quote above by Keynes, diversification is still a relevant and wonderful concept today, just as it was decades ago when Professor Harry Markowitz introduced the concept of relating risk and return in portfolios.
We can observe the concept in action in the table below. Notice that global stocks represented by MSCI ACWI’s return is consistent and offers the lowest volatility (measured by Standard Deviation). Singapore stocks may offer higher returns in the short term occasionally — by diversifying, you may sacrifice some potential short-term upside, however, at the same time you can also avoid some potential downside. That is diversification in a nutshell.
When looking at our investments, we are inclined to compare with the performance of others. Local pundits became very excited at the end of 2020 to early 2021 proclaiming the return of the Singapore market, after a dearth of good news for so many years. OCBC - Recovery will favour Singapore Stocks, FSMOne - Why it is time to bank on Singapore banks, The Star - Singapore to be the biggest comeback story for Asian equities, Straits Times - Five stocks on the Singapore market you wish you bought. If you looked at the performance of the Singapore market then, you would have thought that these market commentators were right (see below). Alas, the rally has since tapered off.
Digging a little deeper, we can see that an investment in any of these regions would have had its ups and downs. At first glance it would appear that you should’ve invested in Emerging Markets for some of the years. After all, there were two instances where the annual returns were nearly 80%.
For Global stocks and Singapore, the ranges are slightly narrower. As we move left to right across the chart, we can also pick out multi-year stretches where either regions lagged behind each other. Global stocks doesn’t seem so exciting, but the first table in this article proves the consistency of the market.
If you broke down the large regions into individual countries and ranked which one was the best performing and the worst performing, you will notice that it is extremely random. Did you expect New Zealand and Denmark to be the best performing region in the past few years?
Buying the global portfolio, you wouldn’t need to identify the best-performing country annually to achieve the returns of the overall region. Investors who diversified across countries similar to the regional index would have been able to capture the weighted returns of all the countries in the regions. That is diversification at work.
Data from 1999-2020. Countries are represented by their respective MSCI country index. Source: Morningstar.
Does this mean the global market portfolio is the right choice for everyone? Maybe not. There could be extenuating circumstances, such as taxation and costs that causes an investor to be better served by a different allocation. But for the rest of us, the global portfolio is the most logical and efficient choice for a long-term investment.
For a second opinion on your current investments, get in touch with us for us to provide a perspective on the costs, risks and expected returns towards your long-term goals.
