Geographical Diversification

The recent earthquake in New Zealand will have terrible financial consequences for many people. The effects on the Kaikoura economy will be massive. On a per capita basis far more serious than the building damage in Wellington.

It brings to mind two things, the importance of insurance and the importance of geographical diversification of your investments.

For those with businesses in Kaikoura the Government has come up with an assistance package. For some that will be sufficient to tide them over till things get sorted out, for many it wont. For those people without business insurance they might lose their business, their livelihood and possibly their home.

Please Consider Diversifying Your Investments Geographically

We often hear it is important to diversify your investments - don't put all your eggs in one basket - spread your risk across different investments in different areas. There are many, many ways to diversify your investments and one sometimes overlooked is by physical location.

It is just a fact of life that New Zealand is more prone than many countries to earthquakes, tsunamis and volcanic events. These massive events tend to bring colossal damage to a large area, if all your investments are in that same area it can significantly affect both their value and ability to generate income.

Here in the Bay of Plenty we sit alongside the ocean, quite close to a fault line, surrounded by volcanoes. Quite likely one of them is going to cause an issue for residents at some stage in our lifetime.

For most our house is our most significant asset and we can insure that.

Our jobs are most likely in the same geographical area. It is not easy to insure against losing our job in the event of a natural disaster and some might not get paid, unfortunately there is not much we can do about that.

But we can diversify our investments geographically so that an event at home doesn't adversely effect them.

If you live, work and invest all your money in one area you are concentrating your financial risk in one place.

In particular consider rental properties you may have. Many people buy rental properties near home. Tenants are unlikely to want to pay the rent while the building is being fixed but the bank will still insist on their repayments and you might have to pay to rent another home while your home is fixed up.

We cannot completely eliminate risk. A major risk is the unknown. Their are "unknown unknowns" that we can't do anything about because we don't know what they might be so we don't know what their effect might be. There are also "known unknowns", we know that their might be a natural disaster, we don't know if or when one might occur but we do know it might so we can consider the likely impact and take that into account when deciding where to invest.

We can cover ourselves for many risks by buying insurance. Diversifying our investments geographically also provides us a form of insurance.

Consider the potential ramifications of a natural disaster on your investment portfolio.

Think "what if a natural disaster struck my home region"? Would it wipe out your investments as well as your home and job? Would it wipe you out completely financially or just make a dent?

A little thought now might save you considerable financial stress in the future.