You might prefer to invest in companies or regions you feel you know, even if that means giving up potential returns. Yet less well-diversified strategies are often riskier and suffer larger drawdowns. For example, if your portfolio contained just eurozone equities then it would have underperformed a diversified portfolio substantially this year. Including other regions and asset classes would have provided not just better returns but also smoother performance.

We believe the best way to grow your investments is investing in financial markets over many years. That’s because the compounding effect is so powerful, where the value of your portfolio is magnified as the returns build up over time. In order to benefit from compounding, it’s important to stay invested through periods of strong and weak market performance.

Remaining patient and committed through good and bad times is only realistic if you are comfortable with the level of investment risk. Our diversified approach means we can construct portfolios that have the best chance of achieving their long-term return targets with an appropriate amount of risk. This involves investing in different asset classes from around the world and adjusting the mix to reflect the evolving environment.

Historically, global diversification has been an important way to reduce portfolio volatility. Since the late 1980s, eurozone shares have achieved annual returns of around 7.5%, which is similar to a globally diversified equity portfolio. Yet those with a diversified portfolio enjoyed a much smoother ride, with an annualized volatility of 14.8% compared with 17.5% for eurozone equities. Notably, a concentrated portfolio of eurozone equities was 20% more likely to suffer a fall over a 12-month period.

Foreign markets tend to be less closely correlated with domestic performance. For example, when the US suffers an economic downturn, China may not be too negatively affected. Therefore, investing in Chinese equities could help support your portfolio value if there is a recession in the US. Most recently, the coronavirus pandemic has shown us clearly how the global economy can move at different speeds and financial markets can behave in ways we would never have thought possible. What’s more, we believe the world is becoming more multi-polar, which emphasises the need for global diversification.

Some investors believe they can create a diversified portfolio by investing in global companies within their home markets — but it’s not possible as each region has its own mix of sectors and companies. Single-nation markets often suffer from a high level of industry concentration. More than half of the UK FTSE 100’s market value comes from just three sectors – financials, consumer goods and materials.

The best way to gain exposure to the world economy is to invest globally. There’s no good reason to ignore these potentially attractive investment opportunities just because they’re not in your own region. Long-term trends, such as ageing populations, as well as the increased demand for clean energy and more efficient ways to produce food are driving changes in the global economy and the relative success of different markets. Yet it’s not easy to identify all of these trends in advance, which is why it’s a good idea to include assets from many different regions in your portfolio.

Home bias describes the tendency to invest most of your portfolio in shares listed on your own country’s stock market – or other domestic assets – while ignoring the benefits of diversifying into global markets. Investing in foreign assets used to be difficult owing to legal restrictions and additional transaction costs. Yet it’s easy to invest around the world today and the only reason not to broaden your horizons is fear of the unfamiliar.

If you invest with a home bias then your portfolio can end up heavily concentrated in one region. For example, eurozone equities make up just 9% of the global stock market. Local political events like Brexit also remind us of the dangers of investing in one market.

If you prefer to invest in your own country’s stock market then you’re not alone. Many people prefer the reassurance that comes with buying shares in companies they know. This behaviour is so common there’s even a name for it – home bias. Yet it’s an approach that comes at the expense of increased risks and missed opportunities. The past year has shown us just how widely investment returns vary between different regions. The best way to achieve a smooth investment journey over the long term is through a diversified portfolio comprising of different assets from around the world.