Investing in different local assets in the name of diversification won’t help anyone. Investors need to go beyond the boundaries of nations and create global portfolios that are mutually independent and exponentially profiting. Here, we discuss in detail the exact advantages of preferring global investment opportunities over local investments. Read along to also find out how adding early-stage startup investments to the mix can boost ROIs by multifold.
The global market celebrated a new milestone as the three major US markets Dow Jones Industrial Average, S&P 500, and Nasdaq Composite, recorded their all-time highs in the first week of November 2021. Similar uptick trends have been seen in almost all stock markets since 2020. However, the localized volatility and steady depreciation in the Indian rupee have forced investors to trust alternative global investments more than ever now.
A smart investor portfolio has the perfect balance of stable and risk assets diversified to reduce the correlation and consequences of individual assets in an investment portfolio. And international markets and budding businesses fit this definition more than any alternative investment options.
As a matter of fact, Indian investments in the US market increased 2.6 times from INR 2,099 crore in 2019 to INR 7,688 crore in 2020, mainly because of the following reasons.
While the Indian markets have steadily grown over the years, their rate of returns (ROR) is not as exponential and lucrative as other global markets. Over the past three years, where Sensex has offered a CAGR of 19.86%, NASDAQ has rewarded investors with a CAGR of 28.49%. And this is primarily because the current industrial mammoths like Amazon, Google, Netflix, Tesla, Microsoft, Apple, etc., are part of this market.
Companies like these are highly trusted and promise continuous growth and innovation and hence, offer the opportunity of gaining supernormal returns. Global investing stacks allow investors from all countries to get a share of these most lucrative markets that are less risky and volatile.
Even seasoned investors misinterpret diversification as choosing more alternative investment options in the same country and market. To achieve true diversification, there has to be minimal to no correlation or influence of any two investments in a portfolio. It means the distribution of capital across countries, markets, industries, currencies, economic cycles, and political environments.
Investors can buffer the volatility of each of these aspects only through multinational investments. This is a common practice in US markets, especially S&P 500 companies which comprise 40% foreign investment.
Over the last 20 years, since Oct 2001, Indian Rupee has depreciated against the US Dollar by 53.4% - or 2.5% per year. A look at forward rates shows that this trend is likely to continue. Investing in global securities listed on the US stock exchanges enables investors to benefit in their investments from the Rupee’s depreciation. This works like a bonus on top of the returns delivered by your global investment.
All countries and their markets have a dominating sector that is highly lucrative; for example, US markets have tech and healthcare, Europe has engineering, and Australia has commodities. Investors who invest locally are restricted by their available options in a market or a country and often miss out on game-changing investment opportunities in international markets.
Be it equities, bonds, ETFs, REITs, BDCs, SPACS, commodities, or startups, global investing opens up numerous avenues for investors to cherry-pick their investment assets from a whole new range of options with varying risk & return profiles. Additionally, investors can choose to build a themed portfolio in specific sectors or a diverse portfolio targeting all sectors without worrying much about local volatility.
Higher Investment Security
India, being an emerging economy, is still affected by the pessimistic ripple effects of other developed economies. Moreover, the rising crude oil prices, increasing interest rates, and introduction of new taxations have been causing sporadic dips in the Indian markets for several years now. Ultimately, Indian markets have become relatively more volatile and risky for HNIs and private investors.
On the other hand, international markets have shown a constantly bullish trend with no signs of dipping. And one of its causes is the higher security and assurance features they offer to foreign investors. In the US, for example, securities of up to $500,000 are insured by the SIPC. This upholds the interest of retail investors and empowers them to explore more opportunities at typical risks.
Investing in Startups
Another branch of alternative investments that investors are head over heels for is early-stage startup investing. Today, percent returns from successful startups can range from hundreds to thousands for early-stage investors, and it can be as lucrative as global investment strategies. And there are many long-term perks to investing in startups, such as: