In Singapore, investors surveyed by Eastspring Investments (2015) had 39% of their investments in Singaporean equities, even though Singaporean equities account for only 0.4% of the global stock market. In addition, Singaporeans are also likely to concentrate their wealth in Singapore through their CPF savings and property investments.
This tendency to concentrate investments in your home country is known as ‘home bias’. Singaporeans may be prone to home bias for a number of reasons. Some Singaporean investors prefer to invest in Singapore because they feel more comfortable and familiar with the local markets. That familiarity leads investors to believe that investing locally is less risky; after all, they don’t have to deal with currency risk, for instance, if they’re only investing only in Singapore.
But in reality, investors with home bias are actually exposing their money to more risk than they realise, and are also limiting their investments from earning the best long-run returns.
By investing solely in Singapore, you’re overexposing your money to the risks that can specifically impact your home country. These risks include event risks and economic risks that are unique to Singapore’s economy, and can impact several or all of the local asset classes.
Trade wars and global events can affect many countries, but given Singapore’s unique position as a global country so involved in international trade (ranking as the 3rd highest trade-to-GDP ratio in the world), Singapore is more susceptible to disruptions than more insular economies would be. In fact, the US-China trade war contributed to Singapore’s sluggish economic growth in 2019: The tariffs that the US imposed on China disrupted the global supply chain, thus reduced China’s demands for imports from Singapore’s key sectors.
As a Singaporean, the majority of your net worth is likely already concentrated locally too: You may own a property in Singapore, contribute to your CPF retirement account, and earn your income in Singapore. Given that a lot of your assets are already linked to the Singapore economy, investing in a portfolio that exposes a sizable chunk of your money to assets in regions, such as the US, Europe, and China, other than Singapore ensures that your portfolio isn’t overexposed to the risks that can uniquely impact any single country in your portfolio.
Investing outside Singapore allows you to seize opportunities from a wider range of economies that are at different points in their economic cycles. In particular, your investment can capture additional long-term returns from assets in countries with strong economic growth. Having a portion of your portfolio invested in the US in 2019, for instance, would enable that portion to earn a return from the US market that you wouldn’t achieve by only investing in Singapore.
Had you only invested in the Straits Times Index (STI) in 2019, your investments would have underperformed both the S&P 500 and the MSCI World Equity Index. The S&P 500 and the MSCI World Equity Index returned 31.3% and 28.4% respectively while the STI returned only 10.4% in 2019.
Investing outside Singapore requires you to strategically allocate your money to the right regions at the right time. Even though the S&P 500 returned three times more than STI in 2019, that doesn’t mean you should have all of your investments in the US instead of in Singapore.
So how much should you have in non-Singapore investments? Properly diversifying your investments is more nuanced than simply dividing your money equally across all countries. Rather, effective global diversification calls for an approach that considers how each country can have different growth and risk factors, and how your investments in one country can move in tandem, or in opposite directions with your investments in another country in varying degrees.
At StashAway, this is exactly what our investment framework does. Our portfolios aren’t only invested globally, but our system also monitors the global macroeconomic environment and intelligently allocates your investments across different regions based on the incoming economic data. So, your portfolio will have a mix of asset classes in each region based on the economic environment of that region, and how it fits into the global economic context.
For example, when our system detected an economic slowdown in non-US economies in August 2019, we re-allocated your investments to have more protective assets in that region. Recently, we updated our allocations again to account for global economic uncertainty. Our intelligently-diversified portfolios also have appropriate exposure to safe-haven currencies, such as the US dollar and Japanese Yen, to hedge your risk in the event of a global financial crisis.
Diversifying your investments across geographies is much more than just diversifying currencies; it’s about exposing your assets to opportunities around the world that you can’t always find in a single economy. With intelligent global exposure, not only are you seeking said opportunities, but you’re also minimising your exposure to economic risk-events that may disproportionately affect a single economy.