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Diversification in an investment portfolio is generally recommended. Can my portfolio benefit from avoiding investment in my local economy?

When browsing several US sites for investment advice, they usually allocate a significant amount of resources to US stocks. I'm Dutch, and Dutch sites i know of seem to allocate a significant amount to Dutch stocks. I can imagine this pattern holds for any local stock advise service.

Recommending investing in local/regional stocks seems to me to be countering the goal of diversification, because you're already significantly exposed to your local economy just by living there: Your job ties you to the performance of a local company, the value of your house is dependent on local factors, and your groceries reflect a local price level.

This would lead me to think that any discretionary investments should not be in local stocks, but instead in other regions than the one you live, in other sectors than the one you work in, in other products than the ones you buy, etc. But I have never seen such a strategy advocated anywhere (am i looking in the wrong places?)

I would like to hear some opinions on this: what are the advantages and drawbacks of staying away from investments in your own region or investments tangential to your own line of work?

  • Don't forget that your home is a property investment whose value is significantly tied to the strength of the local economy (specifically, the local demand for housing you get when people are employed and can afford spending money on houses). – fennec Nov 11 '10 at 21:20
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Diversification is a risk-mitigation strategy. When you invest in equities, you generally get a higher rate of return than a fixed income investment. But you have risks... a single company's market value can decline for all sorts of reasons, including factors outside of the control of management. Diversification lets you spread risk and concentrate on sectors that you feel offer the best value.

Investing outside of your currency zone allows you to diversify more, but also introduces currency risks, which require a whole other level of understanding. Today, investing in emerging markets is very popular for US investors because these economies are booming and US monetary policy has been weakening the dollar for some time. A major bank failure in China or a flip to a strong dollar policy could literally implode those investments overnight.

At the end of the day, invest in what you understand. Know the factors that can lower your investment value.

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The problem is aggregating information from so many sources, countries, and economies. You are probably more aware of local laws, local tax changes, local economic performance, etc, so it makes sense that you'd be more in tune with your own country. If your intent is to be fully diversified, then buy a total world fund. A lot of hedge funds do what you are suggesting, but I think it requires either some serious math or some serious research.

Note: I'm invested in emerging markets (EEM) for exactly the reason you suggest... diversification.

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Diversification is just one aspect in an investment portfolio.
The other aspects in Investment are Risk Taking Ability, Liquidity, Local Regulations, Tax benefits, Ease & Convenience, Cost of carrying out transactions etc.
Investing in other regions is prone FX risk and other risks depending on the region of investment. For example investing in Emerging markets there is a risk of Local Regulations being changed, additional tax being levied, or Political instability and host of such risks. Investing in local markets give you better understanding of such changes and the risk associated is less plus the Ease of carrying out transactions is great, less expensive compared to cost of transactions in other markets.
Diversification in Investment should also be looked upon how much you invest in;
Equities
Debt
Bullion
Real Estate

Once you have a sizeable amount of investment in Equities or Debt, it would then make more sense to diversify this portion more to include funds from other regions.

Unless you are an Running your own business, it makes sense to invest in your line of business if that is performing well. The reason being that the benefit / returns from the equities is much greater than the salary rise / bonus. For example I am in Information Technology and yet invest in all leading IT companies because the returns from companies in these segments have been good.

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