finance
Broadening the investment horizon, so investing in more/different markets, both geographically and asset classes, has its advantages and disadvantages.
Respond to both advantage and disadvantage discussion and add your own point of view.
Advantage
Thanks for kicking off the advantages thread. I think you hit on a key benefit to diversification because since you’re investing in multiple markets and asset classes, the idea is that you will not suffer large losses at any one time preserving the capital investment. Another benefit I can see to broadening the investment horizon is minimizing macroeconomic factors that may only affect one market. This can be done by investing in foreign markets. The benefit to this is that if there is suddenly an interest rate hike in the US, for example, the market could go down. However, investments in other markets where the interest rates are still low, could go up because those foreign businesses are still getting capital at low rates.
This helps minimize the risk if the market in one country dips. However, it’s also important to consider how multi-international firms operate with a global supply chain. If the market goes down in the US and a firm loses market value, that could have a ripple effect across other markets closely tied to that firm.
https://www.investopedia.com/terms/d/diversification.asp
Disadvantage
You both bring up great points about the risk of uninformed diversification. Diversification can be a powerful tool when used appropriately, but can increase vulnerability just as easily. Diversification among assets or markets that are similar or react similarly to market changes will actually make the effects of a volatile market more polarized. Like we have been discussing in class, one tool to we can use is Beta coefficients to determine an investment’s reaction to changes in the market. It can also be helpful to look at trends overtime and understand how different assets interact with the market. Overall, an informed investor can mitigate risk through diversification while an uninformed investor can create risk through attempts to diversify.
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