Ten Reasons To Invest (mostly) In Your Home Country
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? 1. Investing in equities in your home market hedges against the inflation risk your are exposed to. 2. Exchange rate risk. Although I think exchange rate risk is often over stated, it does make the real value of a portfolio more volatile. 3. 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. 4. Access to information is easier. Although the internet has diminished this a great deal, so the continued validity of this argument is questionable. 5. 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. 6. Cultural differences can make it harder to understand businesses, when in businesses driven by fashion and the whim of consumers. 7. Language barriers can be a problem when investing in some markets. 8. 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. 9. 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. 10. 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. 2 Comments “Ten reasons to invest (mostly) in your home country” 1. Mahisha Says: May 25th, 2008 at 2:34 pm I wonder whether point number one works in Sri Lanka. Given that Treasury Bills (TB) yield close to 20% (which gives a negative return after inflation) I have decided to invest in TB and not in the stock exchange for I doubt I will get a 20% total return per year. Do you think I am loosing out by not putting money in to shares and instead, putting them in the TBs? We will assume a 25 year time horizon - say I am planning for retirement. 2. Graeme Says: May 29th, 2008 at 7:48 am I will take it as read that you expect inflation to stay at or above a high rate of inflation. If you assume that inflation is going to remain at about 20%, and the the stock market is not going to beat that, you are implicitly saying that you expect a negative real return on shares. This seems unlikely in the long term, especially given that that Sri Lankan economy has been extremely stable in the past, hardly ever going into recession. Of course there may well be a catastrophic collapse of the economy, or a change in trend to long term stagnation or decline: but in those scenarios your treasury bills are unlikely to be worth much either.
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