Here at MyWallSt, “Diversify” is one of our six golden rules of investing. It reduces your risk by spreading your investments over a wide range of sectors and companies. Typically, investors diversify their portfolios by extending their investments into different sectors (think tech and oil for example). Another common diversification method is to invest in companies of various sizes, from large-cap down to small-cap companies.
Diversifying doesn’t just have to be done based on particular industries however, you can also diversify geographically. Without even realizing it, many investors find their portfolios becoming quite U.S.-centric. This type of overexposure to one market can be quite risky. You’re essentially putting your faith in the continued and enduring success of that one economy. By diversifying your investments geographically, you protect yourself from market-specific volatility.
Another excellent reason to look at this is that different economies tend to perform better at varying points in their overall development. Investing in emerging markets, such as Latin America or Africa, could yield amazing results as they continue to develop. It’s certainly a higher-risk strategy than investing all of your assets in fully developed economies, but that high risk brings with it the potential for high reward.
To help you see why we think geographical diversity can be beneficial, we’ve picked three stocks from different markets that we think would be great additions to any portfolio.
MercadoLibre (Latin America)
MercadoLibre (NASDAQ: MELI) is Latin America’s leading e-commerce company. Operating in a market with almost double the population of the United States, the company represents a massive growth opportunity even despite its massive success in the last two years. Boasting over 320 million active users, MercadoLibre has found amazing success by expanding its offerings into logistics, payment solutions, and credit lines through its subsidiaries MercadoEnvios, MercadoPago, and MercadoCredito respectively.
There are inherent risks with investing in MercadoLibre, however. Political instability, hyperinflation, and currency devaluation within Latin America can be causes for volatility. But as the world becomes more and more connected, MercadoLibre has shown us that it can prosper despite these issues.
As CEO Pedro Arnt put it, “We believe that our business is showing tremendous momentum despite immense volatility in our key markets.” MercadoLibre’s continued growth, along with the rise of internet penetration across Latin America, makes the company an exciting prospect for investors looking to diversify into this burgeoning market.
Check out our video on the topic.
NIO (NYSE: NIO) is a Chinese electric vehicle (EV) manufacturer. As Tesla has already demonstrated, the EV market has huge potential and looks poised to be one of the most disruptive industries of the next decade. Nio is looking to challenge Tesla’s market-leader status and it has every chance to do so through its access to one of the world’s largest markets: China. Investors may be wary of investing in Chinese stocks given recent events surrounding strict tech regulations and the worry surrounding its real-estate market, but NIO’s business model offers more than enough diversity to survive and thrive.
The company not only offers a range of luxury EVs, but also provides energy and service packages, e-powertrains, battery tech, and a wide range of power solutions to its customers. This expansive range of products means that the company isn’t totally tied to the fortunes of one individual market. While EV sales will likely be the company’s primary revenue stream, investors should be please to see this level of diversity from the company.
NIO CEO William Le has predicted that EV sales will make up 90% of Chinese new car sales by as soon as 2030, and the company is expanding rapidly in order to tie up as large a market share as possible. NIO invested heavily this year in opening a slew of new stores and in enhancing its charging stations. This type of future planning could affect short-term profitability but sets the company up well to fend off internal competition such as Li Auto and Xpeng, and the growing Asian presence of market leaders Tesla and Volkswagen.
The company has recently expanded into Norway and has plans to launch in Germany by the end of 2022. This will help minimize the risk posed by the company to investors who are worried about more regulatory clamp-downs by the Chinese government on tech companies.
Like any company, NIO certainly has its risks. The looming threat of further government regulation on tech companies will continue to worry potential investors. However, right now NIO offers one of the most solid options for anyone looking to diversify into the lucrative Chinese market.
Spotify (NYSE: SPOT) is the world’s largest music streaming service, boasting over 422 million monthly active users. The company has posted consistent growth in both users and revenue for more than a decade and wouldn’t look out of place in almost any portfolio.
Despite trading on the New York Stock Exchange (NYSE), Spotify is based out of Stockholm in Sweden and, as such, benefits from the avoidance of some of the volatility associated with the American economy. That doesn’t mean it avoids volatility altogether, but it does allow smart investors to spread their capacity for risk across multiple markets. Europe might not have the same underlying growth potential that Latin America or Asia do, but it offers relative stability away from the U.S. market, which can be difficult to come by.
Recently, Spotify had been investing heavily in exclusive podcast and music content in an attempt to pull in new revenue and users. It also purchased Locker Room earlier this year, a live audio app for sports discussions. This could indicate the company’s desire to move into the live-audio space which would be a potentially very lucrative endeavor.
All of this bodes well for any potential Spotify investors. The company looks to build on impressive growth and continue to dominate the streaming market despite competition from the likes of Apple and Amazon.
Geographical diversification remains an extremely underrated tactic for investors to both reduce their risk and create new earning opportunities. Exposure to multiple markets allows you to navigate regional volatility and potentially benefit from the rapid development of emerging economies.
Read the other articles in our Diversify series here;