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What Is Global Diversification?

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  • Written By: Jim B.
  • Edited By: M. C. Hughes
  • Last Modified Date: 22 November 2016
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Global diversification refers to a strategy by which investors attempt to improve their portfolios by putting capital into investment vehicles that are located in various parts of the world. As with all types of diversification, it is an attempt to minimize risk and maximize potential returns. The idea behind global diversification is that when the economic fortunes of one country are suffering, there may be other countries that are thriving. Since this is the case, it is a good idea to spread investments across a wide range of locations to protect against the damage done by a severe downturn in one area of the world.

Many people only consider the investment opportunities available to them in their own corner of the world. Whether out of a sense of patriotism or simply because they are unaware of global investment strategies, they keep their capital in securities from their own country. If the economy of that country struggles, it is nearly impossible for them to avoid significant damage to their portfolio. For that reason, global diversification is a strategy used by investors attempting to avoid such a narrowly drawn series of investments.

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The strategy of global diversification can help an investor in several different ways. First of all, the exposure that is gained to different markets provides growth opportunities that might not be available in local markets. In addition, any type of diversification technique is a good way to practice risk management. After all, it is somewhat unlikely that a broad range of investments from different parts of the world will all be doing poorly at one time.

There are a number of different ways to practice a global diversification strategy. One way is to simply make a series of investments in stocks or bonds, making sure that they are spread out across the globe. Another simpler method is to invest in a mutual fund which focuses its investments on global securities. In this way, investors can get the benefits of diversification while making a single investment, perhaps saving funds in the process.

While many investors believe in this strategy, it is not without its risks. In a short period of time, a certain set of circumstances can damage economies across the globe, especially now that these economies are increasingly interconnected. Even global diversification might not be able to prevent damage to investors from such an event. As a long-term gambit, however, it is more effective. Differences in the fortunes of multiple countries are more likely to manifest themselves over a number of years.

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