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Finance How to protect your portfolio from political risk: six strategies So now that you know about what political risk is, what concrete actions can you take to protect your portfolio from these risks? Let’s take a look at some effective strategies. Know what you’re getting into Remember what your grandma said about an ounce of prevention being worth a pound of cure? It works the same way with investing − the best way to solve an investment problem is to avoid it in the first place. In the context of political risk, understanding what youmay be signing up for before you actually put your money into a given country will always be the first and most effective way to manage political risk. If you invest your portfolio overseas, make it a habit to do your “political due diligence” as part of your normal research and analysis. That goes double if you’re putting your money to work in emerging markets where political risk tends to be more extreme, or in sectors of a given country’s economy that have historically been prone to political interference (mining andmineral development, for example, or oil and gas production). Should that knowledge keep you from investing overseas? Not necessarily. But at the very least, going into the opportunity with your eyes wide open will keep your expectations realistic and will make you better able to identify potential problems before they become acute. Keep up with what’s going on Political risk is constantly changing and evolving. This means that your analysis of that risk should not be a one-time activity which only takes place when you purchase a particular investment. Rather, you should constantly monitor your international investments (and the geographic markets in which they operate) for potential political risks. How do you do that? Well, your regular newspaper is a good place to start for a general overview on what’s going on in different regions of the world. Weekly newsmagazines such asThe Economist can provide you with a muchmore thorough understanding of the current political and socio-economic events in specific countries. Financial newspapers such as Barron’s offer an investment-related angle on such stories, with professional-level reporting on the potential impacts which political change can make on businesses and industries. Neither of these are what you’d call “light reading” but, if you’re really looking to understand how a different part of the world works and invests, they’re the go-to publications. Is such constant review necessary for the average snowbirds who limit their international investing to a handful of well-diversified, professionally managed mutual funds or ETFs? Probably not. But if you’re a stock picker who singles out specific companies for investment, or you’ve made oversized bets on any one market or geographic region, then yes, it’s a good idea to keep abreast of what’s going on, so that you can get advance warning on any trouble brewing that might affect your portfolio. Diversify, diversify, diversify If you’re a regular reader of this column, you’ve heard us discuss the importance of diversification before. Simply put, diversification is an important principle of investing − a simple strategy that can prevent many portfolio problems before they begin. But it is utterly critical when it comes to managing political risk. How much diversification is appropriate? As we’ve said before, that largely depends on your personal goals and tolerance for volatility. But, in general, if you’re concerned about political risk, keep your portfolio focused on jurisdictions with a strong rule of law. Those with greater risk tolerance can spread their portfolio among developing nations in Asia and Eastern Europe. If you’re comfortable with volatility, you can diversify further and invest in so-called “frontier” markets in Africa, Latin America and Southeast Asia. But keep such investments as a smaller portion of your overall pie. Such diversification cannot eliminate political risk altogether. But by spreading your investments among many countries, and among multiple asset types, you can limit the effect of policy change, government interference, and conflict in any one country (or region) on your portfolio. Even the pros follow this strategy. Which means that you should, too. 32 | www.snowbirds.org

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