The advantage of owning the world

The sixth in our series of articles serialising ANDREW CRAIG’s book How to Own the World: A Plain English Guide to Thinking Globally and Investing Wisely goes into the advantages awaiting investors who work to “own the world”.

Andrew has worked in the City of London for over 20 years. In 2011, he founded plainenglishfinance.co.uk, a personal finance website that aims to help people to improve their finances.

When I talk about “owning the world” I mean:

You should own a wide variety of investment products or assets. In the long run you will want to have cash, shares, bonds, commodities and property, not just one or two of these.

You should aim to own assets from all over the world, not just one geographical area such as the UK or the USA.

You will recall from earlier in the book that the world economy as a whole continues to grow. You will also remember how important it is to be diversified. Owning the world means that you end up being diversified both geographically and by asset class.

But what does this mean?

Geographically diversified

“Geographically diversified” simply means that if one part of the world is having a difficult time, perhaps Europe or the USA, you still have a good chance of making money because you have exposure to another part of the world that is going up a great deal, for example certain emerging markets or Japan. Every year, different parts of the world are stronger than others.

Rather than trying to work out where the best place for your money will be next year, which is difficult and time-consuming, it is easiest just to be invested in every major part of the world. This means that you benefit from the consistent growth of the world economy as a whole. Bear in mind that the world has only really ever had ‘down’ years across the board in times of major war.

One of the biggest mistakes people make with their investments is that they tend, in the main, to own assets from their own country. This means two things: firstly, that when that particular country or geographical area has a difficult time, their investments there will struggle. Secondly, that they miss out on the potential for explosive growth that comes with owning what some would deem to be more exotic parts of the world.

It is worth noting that stock markets in many of the faster-growing areas of the world can double or even triple over quite short periods of time. With that sort of performance, you don’t need to have a large share of your money exposed to these markets in order to enjoy a material impact on growing your wealth and achieving the sorts of numbers we saw at the beginning of this book.

There is no guarantee that this will continue. The trend might even reverse, and growth in the USA and the UK might one day again be better than in places like China, India and Brazil (at the time of writing this third edition of the book this is basically the case – underscoring the point).

The key point here is that you may not want to spend too much time trying to work out what is going to happen. A simpler approach is just to ensure that you have exposure to the world as a whole. As the world keeps growing and developing, this approach will give you the best chance of benefiting from that growth.

I would repeat that the only time the world as a whole has failed to grow has been in times of major wars. If we are unlucky enough for the “Third World War” to happen in our lifetimes, your investment performance might be the least of your concerns. Having said that, without wanting to sound horribly cynical, smart money has usually found that even wartime can be reasonably lucrative. Even in the case of another world war, there will be opportunities for the informed and enlightened to keep their money safe and possibly even to grow it.

Leaving aside that rather depressing possibility, however, in the more normal run of things, “owning the world” simply means that you want to end up with exposure to everywhere: the UK, Europe, the USA, Japan and the rest of Asia, as well as various emerging markets. You will want to own assets in as many places as possible so that you catch those doubles and triples over the years, and benefit from the explosive growth of the global middle class. In an ideal world, you might also own a wide range of types of company – large and small – in all of these regions.

One of the reasons relatively few people pursued this sort of strategy in the past is that it used to be very hard for a private individual to invest like this. It is also the case that relatively few financial advisers have a grasp of how to do it or even why it is a good idea for all the reasons we looked at earlier in the book. Not that long ago, this strategy realistically wasn’t possible for a private individual. Today you can get closer than ever before to this sort of asset allocation without paying crazy fees – even if you only have a small amount of money to start with.

Diversified by asset class

“Diversified by asset class” means that in those dreaded crash years when shares (equities/stock markets) fall off a cliff, as most of them did in 2000 and 2008, for example, you won’t lose a vast chunk of your money like everyone else. You’ll actually have a good chance of having a positive year (or at least a far less negative one than most people) because, even though your shares might have fallen in value, you will own other assets such as property, bonds, gold, silver, oil and other commodities. Many of these will have held up very well in a bad year for shares. The reason this happens is due to a phenomenon called “negative correlation”.

It is often the case in investment that certain types of asset tend to go up when others go down; that is to say, they are negatively correlated. This relationship in real life is never exact, but if you own a wide variety of types of asset rather than, say, just shares or just property, you have a much better chance of seeing your money continue to grow if there is a stock market or property crash, for example.

Gold went up in value every year from 2000 until 2011. What a shame that the vast majority of people in the world did not own any. Before that, shares had gone up virtually every year for a decade or so, whereas gold went sideways or down for a long time. In 2007–9, stock markets around the world crashed by more than half but oil hit an all-time high in 2008 and gold was up nearly 20 per cent in 2009.

In the long run, it is much easier to own a mixture of assets so that you have a better chance of owning something that goes up when another type of asset crashes.

To summarise: the holy grail here is your money being put to work with the minimum of effort but the maximum exposure to the world as a whole. Ultimately, you will want to be the proud owner of a wide variety of assets – shares from all over the world, cash, commodities, bonds and property – so that you will benefit from global growth, wherever it is, in the future.