Why it is important to reduce country risk from your investment portfolio?

COVID-19 has got the entire world fighting against a common problem. However, each country has dealt with the crisis in a completely different way. Some countries like Singapore and Hong Kong have been able to contain the virus effectively, while others such as Italy and Spain have suffered immensely.

From an investor’s perspective, times like these are a good reminder of why having your complete portfolio tied to one country’s fate can be dangerous. One misstep from a country’s leadership can send the entire economy, and along with it the stock market, in a downward spiral. Therefore, it is only wise to not have your investments completely dependent on one country.

We as Indian investors have been quite poor at diversifying country risk.

How much of your portfolio is India-dependent? It’s very likely that this number is greater than 95 percent.

Whereas, if you look at the portfolios of individuals in the US, about 15 percent to 20 percent is diversified internationally. Geographic diversification is the need of the hour and arguably the best way to do this is to get access to the US markets.

At a total market cap of more than $40 trillion, the US markets are the largest and deepest in the world. Nowadays due to technological advancements, opening a brokerage account in the US is almost as easy (if not easier) than opening a local demat account. The process has become quite simple and cost-effective, thus allowing every individual to become a global investor.

By investing in the US markets, one can take advantage of multiple interesting opportunities. Investors can now invest in a lot of the global consumer brands that they might be using on a daily basis such as Amazon, Netflix, and Google. In fact, one can also invest in companies that they don’t use but are believers of, for e.g. Tesla or Beyond Meat.

Another opportunity that often goes unnoticed is that the US markets offer the opportunity to invest in the entire world. There are ETFs available such as Vanguard’s Total World Stock and Total World Bond ETF that provide exposure to global equity and debt markets as a whole. Additionally, for countries like China, Argentina, Vietnam etc. there are individual country ETFs as well.

One of the challenges that an investor investing in the US markets might face is investing as per their risk profile. Since the US markets are relatively new to us, one might end up taking an unnecessary risk for the investment goal that they have in mind.

For example, an investor saving for his or her child’s foreign education coming up in the next 3 years should avoid investing directly in stocks and rather create balanced equity and debt portfolio via ETFs. There also exists a currency risk since funds are converted into USD and then back to INR upon withdrawal. However, over the last 10 years, the Rupee has depreciated 3-4 percent each year against the dollar. So, this has in fact added 4 percent to rupee returns for investors.