I love New Zealand - its land, institutions and people - and never feel terribly comfortable anywhere else. However, I would not have all my money here. For all its virtues, New Zealand has a small, vulnerable economy.
To invest only here is like living in Cricklewood, ignoring all other opportunities and investing solely in Cricklewood
- Cricklewood property, Cricklewood businesses - and having your money in the Cricklewood Savings Bank.
No one would say that investing solely in Cricklewood is sensible but in global economic terms, New Zealand is Cricklewood.
I always ask investors how their portfolio would perform if New Zealand got foot and mouth disease. This makes rural people shake uncontrollably, but it ought to get all of us upset. An economic disaster like that would skittle our two major industries - tourism and agriculture - and dump the Kiwi dollar on the floor.
All investors have to get some of their funds offshore - they have to own investments which are outside New Zealand and not denominated in New Zealand dollars. This may mean using managed funds but not managed funds denominated in the Kiwi dollar.
Having offshore managed funds in New Zealand dollars still leaves you vulnerable to a major fall in the currency.
Offshore investment using foreign currency is especially important for people who travel significantly or who have other liabilities in foreign currency - these foreign liabilities need to be matched by offshore investment assets.
Buying a pint in London might be expensive at present but if New Zealand had an economic calamity and the Kiwi dollar bought, say, 12 pence, the cost of that pint would be prohibitive.
Diversification and risk reduction are not the only benefits of offshore investment. Investing in other countries gives opportunities unavailable in this country - industries such as biotechnology, brands such as Gillette or Johnson & Johnson or the fast-growing economies of China or India.
Offshore investment can give you a double whammy because of currency movements both ways. If your investments go up and you get currency gains as well, your returns can be magnificent. However, if both the markets and the currency go against you, the returns can be dismal.
Sometimes you get a bit of each, which balances things out. For example, last week I reviewed the past six months' performance of a client's portfolio.
They had quite significant investment losses - mitigated by exchange rate gains. The net result was their portfolio was down just under 10 per cent - not bad considering recent investment mayhem.
* Each week financial author Martin Hawes shares strategies to help you grow your wealth. You can email finance questions to info@wealthcoaches.net or andrea.milner@heraldonsunday.co.nz
<i>Martin Hawes</i>: Godzone too small to bank on
www.wealthcoaches.net
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