Tony Luckett

Give your portfolio a little international flavour.

In Mark Twain’s The Tragedy of Pudd’nhead Wilson. the wise man says to put all your eggs in the one basket and watch that basket! This was in reply to the fool’s remarks that you should put not all thine eggs in the one basket. The wise man further scorned the fool’s policy of diversification as being nothing more than scatter your money and your attention.

This is another case where the wise are wrong! Most investors should follow the fool’s advice and diversify; spreading their wealth between several investments to avoid the risk that a single bad investment would completely destroy their finances.

Those who followed the wise throughout history have all too often sadly placed much of their savings in high-flying failures such as Enron and Polly Peck or the current ‘hot sector’ only to be left with little or nothing when their investment turned out to be a bad egg. Consider the scare that savers with the Icelandic banks had last year when it became debatable as to whether they would get their money back in full.

Why Diversify?

Many investors diversify by spreading their wealth amongst several investments in the same economy. There is a problem with this strategy; your wealth is concentrated in one country and unfortunately countries can get into economic difficulties as we seeing all too often nowadays. Investors who kept their assets in Zimbabwean dollars have been all but obliterated thanks to Zimbabwe’s hyperinflation whereas those who diversified into South Africa and the rest of the World have fared much better.

If you travelled in cold war Eastern Europe and the Soviet Union you probably noticed the locals’ preference for US Dollars and Deutschmarks which helped them to diversify away from their own countries’ weak currencies. History shows us that you cannot rely upon politicians and nations to keep your investments safe; one way to protect yourself is by spreading your wealth between several countries.

This is not to say that you should keep everything overseas. Consider the example of those ex-pats living in Spain who rely upon the income from their British pensions for their living costs. Unfortunately these costs are largely denominated in Euros and the sharp fall of the pound against the euro over the last couple of years has drastically eroded their real income.

If you consider that the British economy is going to have a rough few years, as the economy works through the hangover caused by the massive public and private debt binge of the last decade, you might wish to alleviate some of this risk by investing overseas.

Diversify through investment and unit trusts

An easy way to invest overseas is via a British-based investment trust or unit trust which invests in countries and/or sectors in which you are interested. Apart from spreading your investment amongst a number of companies, delegating the investment in this manner avoids the complications involved in buying individual shares. In some countries, unlike the UK, it can be expensive to buy small shareholdings and there’s the added problem of dealing with the local language if the company doesn’t publish annual reports which are written in English.

Buying shares in broad based global investment trusts such as Foreign & Colonial (LSE: FRCL ) or Templeton Emerging Markets (LSE: TEM ) enable you to literally spread your investments around the world, reducing your reliance on any one economy.

Diversify through individual shares

It’s fairly easy to buy shares in a foreign company; most stockbrokers are geared up for buying shares in overseas markets and the whole process isn’t much more difficult than placing an order for shares in a British company.

Another reason to invest overseas is that it gives you access to businesses such as Google. Nokia or Shimano which don’t have a British equivalent. If you were looking for ways to play the Internet boom in the late 1990s you’d probably have noticed that most of the Internet companies were American; there weren’t any realistic British equivalents of the likes of Amazon or eBay. Shareholders in the American car manufacturers Chrysler and General Motors would have been better off by diversifying into overseas car manufacturers such as Germany’s BMW or Japan’s Toyota rather than staying at home.

An alternative way to diversify overseas is to buy shares in those British companies which only have a small proportion of their business in Britain. Companies such as BP (LSE: BP ), Diageo (LSE: DGE ) and Vodafone (LSE: VOD ) meet this criteria since only a small proportion of their sales come from Britain. The ‘British’ nature of these companies is more a reflection of their history and, should the British tax authorities impose more onerous restrictions upon their businesses, globalisation makes it relatively easy to for them to move their headquarters overseas as companies such as Charter (LSE: CHTR ) and WPP (LSE: WPP ) have already done.

Diversifying overseas adds another string to your metaphorical investing bow and lessens your exposure to the British economy and its travails.

More from Tony Luckett:

> With The Motley Fool Share Dealing Service you can buy and sell UK shares for £10 and international shares for £17.50. Open an account for free today .

> Tony owns shares in BP and Diageo.