This risk could make or break your portfolio returns
The outlook for the global economy remains highly uncertain. For example, the European economy could be negatively impacted by Brexit and the end of quantitative easing in 2018, while the US continues to face political challenges. Meanwhile, the geopolitical outlook in Asia regarding North Korea continues to create an unstable outlook for the region.
Due to the potential for difficulties in these areas, as well as many others, it could be crucial to ensure that a portfolio is not only diversified at a company level, but also in terms of the mix of regions in which those businesses operate. This may not only reduce the risk of loss in future, but could also improve growth potential, too.
While investing in companies listed on different stock exchanges across the globe may seem like an obvious means of reducing geographical risk, the process may be simpler than that. With the world economy becoming more globalised in recent decades, a range of large companies now operate in a number of different markets across the globe.
Therefore, it may be possible for an investor to buy shares in companies listed on one index only and, provided he/she chooses companies with exposure to a range of economies, deliver a wide geographic spread. This would be likely to keep costs down for the individual investor, and also make the task of managing their portfolio much simpler.
Of course, different regions across the globe have a high degree of interdependence with one another. This means that what happens in one region is likely to have a direct effect on the outlook for other regions. However, it does not mean that all regions of the world are expected to grow at a similar pace in future.
One reason for different growth rates over the next couple of years could be alternative policy choices made by Central Banks. For example, in the US and UK the Federal Reserve and Bank of England are looking to tighten monetary policy at the present time. This could create lower GDP growth rates in future and may mean that the potential for profit growth from companies operating in those countries declines. Similarly, the ECB has delivered a highly accommodative monetary policy in the Eurozone, and this has created strong growth opportunities for companies operating in the region.
Looking ahead, it may be prudent for investors to therefore have a mix of companies operating in different regions due to the potential for higher growth opportunities. With China continuing to offer one of the highest growth rates in the G20, for example, focusing on consumer goods companies or financial services providers operating in the country could be a shrewd move.
Likewise, it may be prudent to consider the effect of reduced monetary policy stimulus in the UK, US and even the Eurozone next year. Buying shares in companies operating in a range of developed and developing markets could be one means of doing so. It could boost the risk/return ratio of your portfolio in the long run.
Improving your financial outlook
Of course, finding the best companies to buy in a range of regions is no easy task. The world economy faces a number of major challenges, which is why the analysts at The Motley Fool have written a free and without obligation guide called The Foolish Guide to Financial Independence.
The guide could help you to achieve improved portfolio performance over a sustained period by selecting the stocks with the most enticing risk/reward opportunities.
Click here to get your copy of the guide - it's completely free and comes without any obligation.