by : Martin
The novice investor who starts investing on his own is always faced with the dilemma of where to start. As we have already commented many times, with ETFs we can easily access any asset class. But this can be a problem since if we do not have experience in choosing among the more than 5,000 available ETFs we can lose ourselves.
How to invest in the world and obtain the maximum diversification
The solution is to invest through a “World index” ETF. With it we will obtain the following advantages:
- Being able to win the losers game
- Diversify to the maximum to reduce the risk
- Have lower costs
Luckily there is a highly reputable index, the MSCI World, which gives us instant exposure to the world’s leading companies. Almost everyone knows the S&P 500 Index as one of the most popular indices for tracking American equities. Well, the MSCI World would be the same, but nothing more and nothing less than for the world.
It also allows us to have exposure to all kinds of sectors. The financial sector continues to have a strong weight (18.2%), but in the event of another fall in this sector, we will surely also have the benefit of a strong rise in another sector. For example, the technological sector has the second weight in importance: 15.9%. Investing in the world guarantees you to avoid the so-called “home bias”. That is, we will automatically avoid having a bias to invest only in what is known, our country or our continent. Even so, if we look at the composition of the index we will have a strong exposure, more than 58% in the United States.
This guarantees us not only to have a broader global coverage but also a higher potential growth, greater diversification, but with an increase in volatility and the cost of the ETF.
How to invest in the world beyond developed countries
Curiously, the MSCI World despite its name does not represent the entire world. In other words, it only incorporates developed countries. In order to have a broader global exposure, we may want to use another index: the MSCI ACWI (All country world Index). This includes not only the 23 countries considered developed, but also 23 other emerging markets. This guarantees us not only to have a broader global coverage but also a higher potential growth, greater diversification, but with an increase in volatility and the cost of the ETF.
How to invest in the world beyond an index
Investing with a world index we achieve a very good regional diversification. But on the other hand we do not achieve diversification in the different asset classes. Typically an investor will need to balance their desired equity exposure with at least one other fixed income ETF. It may also be desirable to have exposure to other asset classes to have an optimal asset allocation adjusted to your risk profile. The more sophisticated investor however prefers to assign the regional weight using different ETFs by geographic area.