The term diversification is used often in investing. Most people with any experience in investing know that, to protect one’s investments from undue risk, it’s always wise to spread your money around, so to speak, so that failure in one type of investment doesn’t affect all the others. Pretty simple, right?
However, although the principle of diversification is often used with respect to investment class or type — such as bonds, stocks, alternative assets, etc. — a type of diversification that can sometimes get overlooked is that of location. In other words, investors sometimes get caught in the trap of keeping their money in one familiar location, instead of trying to spread it around globally. And the risks of doing so are considerable.
Not all markets are the same
Think about it. Although globalization has certainly come with the reality that what happens in one market location will affect another market location, no two global locations are alike and, as a result, not all markets are subject to the same kinds of risks. Hence, the need for diversification.
Let’s take an example. In fact, let’s take a look at what’s happened here in our own backyard. Although the economies of Canada and the United States are integrated in so many ways, they haven’t always followed the same path, and a failure to notice can result in lost opportunities.
Perhaps no sector has exhibited this kind of cross-border difference than housing. Back in 2008 and 2009, both sides of the border were most definitely negatively impacted by the global recession brought on by the housing crisis. However, while Canada’s housing and construction sectors bounced back quite quickly to pre-recession levels, and have continued to boom to unprecedented levels until even today, the story south of the border has been dramatically different. Only recently has America’s housing sector showed serious signs of life. In the meantime, the sector was struggling mightily just to keep its head out of water.
Taking advantage of opportunities
Now, there was no shortage of players in the sector that didn’t recognize the gap and, most importantly, fail to take advantage of it. One reason might be because, well, sometimes Canada can be easy to overlook, even when it’s outperforming its southern neighbour in an important economic sector. However, for forward-looking and discerning investors, the difference would have been recognized and taken advantage of — if, for no other reason than to diversify one’s investments in any asset class.
And such global or location diversification can work the other way around, too. Moving forward, the American housing sector could advance in ways that Canada’s can’t. That’s why such diversification is so important. It not only diversifies the risk, but maximizes regional opportunities, too.
ASCEND GRP is an asset-management firm, with offices in Toronto, Richmond Hill, and New York, that services clients seeking investment opportunities worldwide.