For those who want to invest globally, exchange-traded funds are one way of doing so with a degree of diversification.
"ETFs have made it extremely easy and inexpensive to invest in global markets that were once inaccessible to small investors," says Dan Bortolotti, investment adviser at PWL Capital Inc. in Toronto. "It's now possible to build a global portfolio with thousands of stocks in more than 30 countries for a fee of less than 0.25 per cent."
In his view, ETFs provide a relatively simple investment gateway to commodities, industries and services that would otherwise be opaque.
"In general, we believe Canadian investors should keep about two-thirds of their equity portfolios in foreign stocks," says Mr. Bortolotti, also known as the Canadian Couch Potato investment blogger. "Typically we suggest one third Canadian, one third U.S., and one third international. The international component includes both developed and emerging markets."
An advantage of ETFs over mutual funds is that sophisticated investors can use shorting strategies in a region where they see a downward trend, suggests one adviser.
"Take Ukraine for instance – I wouldn't be terribly excited about going long, but Ukraine does have a stock market and you can short it," says Reg Jackson, vice-president of JMRD Wealth Management team at National Bank Financial in London, Ont.
Short selling, a strategy used mainly by experienced, sophisticated investors, involves the investor borrowing the securities from a broker's inventory. The securities are credited to the investor, who hopes the price goes down – if it drops, the investor later buys at the lower price and pockets the difference from the original borrowed price.
Shorting is not for the faint-hearted. Mr. Bortolotti cautions that even when you buy ETFs from other parts of the world, you should expect a bumpier ride than from North American funds.
"Investors should expect emerging markets stocks to be more volatile than Canadian, U.S. and developed international markets," he says. "Emerging markets delivered the highest annual return, but also the greatest volatility."
He notes that between January, 1988, and last month, the annualized return for the S&P/TSX Composite Index was 8.5 per cent, with an annualized standard deviation (its volatility) of 14.5 per cent. For the same period, the MSCI (Morgan Stanley Capital Investments) Emerging Markets Index returned an annualized 11.5 per cent; its standard deviation was 20.6 per cent.
Some regions may seem challenging for investors to consider but can be rewarding in the long run, notes Geoff Dover, chief investment officer for Kestrel Capital Global Investors, a unit of Kestrel Capital Management Corp. For example, investors who look to sub-Saharan Africa because of its rich resources and potential for more minerals, oil and gas overlook the region's real potential, argues Mr. Dover, who is based in Dubai.
"I think the real interest in sub-Saharan Africa and other frontier markets is getting exposure to their rising consumers, through telcos, breweries, consumer staples, cement, financial services and so on," he says.
Think globally but act regionally, not too locally, advises Mr. Bortolotti. "Broad diversification is key when investing globally, so we do not recommend using single-country ETFs," except for the United States, he says.
"ETFs that focus on a single country often have large concentrations in a small number of individual companies." A regionally based ETF spreads the risk more widely and makes it easier to avoid over-concentrating on one country whose economy happens to be fashionable at a particular moment.
If your portfolio is well balanced, you shouldn't sweat it if an emerging market ETF takes you for a wild ride from time to time, Mr. Bortolotti adds.
"You have to be prepared for that. We saw that in 2008 – everything went down, but I think emerging markets went down the most, over 50 per cent," he says. "But if you're including emerging markets in a broader portfolio, you're not going to see that volatility."
Mr. Bortolotti doesn't like to become too engaged in a particular region's prospects. "You get into timing and tactical behaviour," he says, and that can be a mistake if you're trying to build a stable, balanced portfolio.
International indicators can go in many directions at once. For example, the Economist points out that right now India "is benefiting from a worldwide slump in energy prices" – its GDP grew by 7.5 per cent year over year in the last quarter of 2014.
At the same time, "successful companies [in India] face huge obstacles and much red tape," it notes.
Look for the bigger picture, don't get rattled and go for that balance of domestic and international ETFs, Mr. Bortolotti advised.
"A couple of years ago people were running away from Europe. But Europe has outperformed [since then]."