Most portfolios that look diversified are diversified in only one direction. Ten companies is not ten bets if all ten answer to the same currency, the same central bank and the same economy.
In short
- A single market ties your returns to one currency, one rate environment and one economy at once.
- Adding a second market loosens all three, which is why it does more than adding a tenth company.
- Diversification lowers the chance of a single event ruining you. It does not remove risk.
- Holding across borders introduces currency movement as something new to think about.
Three things that move together
Concentrating in one market exposes you on three axes simultaneously, and they tend to move in the same direction at the same time.
Currency
Everything you own is priced in one currency. If that currency weakens against the one you actually spend, your holdings can rise in local terms while falling in terms that matter to you. For anyone earning abroad and investing at home, this is not a footnote.
Interest rates
One central bank sets what a safe alternative pays. When rates rise sharply, shares across that whole market compete against a suddenly more attractive risk free return, and they tend to reprice together.
The domestic economy
Your companies mostly sell to the same customers. A slowdown reaches a bank, a brewer and a cement producer through different routes, but it reaches all of them.
Diversification is not about owning more things. It is about owning things that fail for different reasons.
Why a second market beats a tenth company
Adding another company inside the same market reduces the damage any single business can do. That is worth something, but the ninth and tenth additions do far less than the second and third did.
Adding a different market loosens all three shared exposures at once. That is a different kind of protection, and it is why an investor holding across Lagos, Nairobi and Johannesburg is in a genuinely different position to one holding ten companies in any single one of them.
What spreading does not fix
It does not remove risk, and anyone selling it as safety is overstating. A broad decline takes broad portfolios down with it. Markets have become more correlated over time, so the protection is smaller than it once was.
It also introduces something new. Holding across borders means currency movement now affects you in both directions, and you are dealing with more than one regulator, tax treatment and set of paperwork. If you are investing into a market you do not live in, the administrative side deserves its own attention.
A reasonable starting point
- Work out what share of everything you own sits in a single market. Include cash and property.
- Work out what share sits in a single currency. For many people these two answers are the same number.
- Decide what proportion in any one company would genuinely hurt, and treat that as a ceiling.
- Add exposure gradually rather than rearranging everything at once.
The aim is not to eliminate concentration. It is to make sure no single event can take out everything you own.