Fisher Investments Australia reviews global diversification’s benefits

Diversification sounds good, but what does it actually mean to be diversified properly? Here Fisher Investments Australia reviews diversification – and explains why we think diversifying globally makes sense for most investors.

Some think diversification amounts to owning a little bit of all kinds of assets – stocks, bonds, cash, maybe even some other things like commodities or crypto. No. That is asset allocation. Diversification is what you do within these asset classes to manage risk and increase opportunity.

For equity allocations, that doesn’t just mean limiting your exposure to any single stock, but also ensuring you aren’t overly concentrated in any sector or country. Consider: the ASX 200’s two largest sectors by market capitalisation are Financials (33.6% of the index) and Materials (18.9%).[i] Or take the MSCI Australia Index’s 48 constituents: 40.1% are Financials and 18.3% Materials. So over half of these Australian indexes are engaged essentially in banking and mining. But is that prescription prudent for you? How does this relate to the world?

Whilst it might seem sensible to mirror that in your own portfolio, when Fisher Investments Australia reviews such practices, it isn’t always great for returns. There is no home-field advantage in stocks: no country is guaranteed to lead (or lag) for all time. The same goes for sectors. When Finance and Materials are in favour globally, Australia would probably be, too. But what about when they aren’t?

Global diversification opens a much wider opportunity set, allowing you to spread your assets across more sectors and geographies, mitigating economic and political risks, whilst letting you see – and participate in – potential opportunities arising around the world. Consider: the MSCI Australia Index rose 43.5% in the three years through July 2025.[ii] Sound good? The world rose 68.4%.[iii]

To get an idea of the more expansive menu a global outlook affords, the MSCI World Index contains 1,322 stocks from 23 developed market economies.[iv] The largest is America, weighing in at 72.3% of the index, and the smallest is Portugal with less than 0.1%. Australia? 1.7%.

The MSCI World Index’s 11 sectors also run the gamut from Information Technology’s 27.0% to Real Estate’s 1.9%.[v] The ASX 200’s Tech weighting, though, is just 3.4%. (The MSCI Australia Index’s is 2.5%.) This is one key reason why the world outpaced Australian stocks in the trailing three years. Australian investors who focussed primarily on stocks Down Under may have missed out on a Tech-led stretch.

But for those diversifying globally, portfolios are more likely to cover major regions and industries of the world economy. Increasing your opportunity set at the country and sector levels – or any other categorisations you may find useful – leaves you better positioned to participate. And, ultimately, likelier to reach your financial goals.

Security-level diversification matters, too – true whether you diversify globally or no. Owning only a handful of companies raises risk for the simple reason that if anything goes wrong at one (that markets don’t already reflect), it would weigh on your portfolio big time. Say a company-specific issue arises – an accounting problem raises governance concerns, a competitor outflanks it, margins erode or there is a management shakeup. Have too few securities, according to Fisher Investments Australia’s reviews of these situations, and it could detract from returns substantially.

By the same token, sectors and countries rotate in and out of favour. Owning many stocks – dozens even – doesn’t necessarily mean you are adequately diversified if most share common drivers (as those grouped into sectors tend to) or political risks (e.g., radical legislative overhauls to taxes, regulations and property rights). So good diversification isn’t just about holding a whole slew of stocks but carefully considering how they all work in concert.

Diversification in general is central to prudent portfolio management. And global diversification – spreading your investments across multiple countries, sectors and securities – limits concentration risks most of all. As Fisher Investments Australia reviews the matter, global diversification is the gold standard.