The Importance of Geographic Diversification

Every investor knows about diversification, and knows they should do it, but do you know why you must diversify? In essence, it reduces your risk. If you only own one stock, even if its Google (NASDAQ: GOOG) or Apple (NASDAQ: AAPL), your portfolio is completely dependent on the consistent performance of that one company. If you only own tech stocks, you're overexposed to one industry and a pull-back could have devastating effects. That's why investors will typically spread their holdings over a number of sectors, to ensure if one is hit, that their entire portfolio doesn't suffer. 

One form of diversifying your portfolio which gets less spotlight than perhaps it should is geographic diversification. It's very easy to find yourself over-exposed to one region, usually your own, without even realizing it. It's important to distinguish at this point between where a company is based and where its revenue comes from. Taking Coca-Cola (NYSE: KO) as an example, while it is as American as apple pie, the majority of its revenue comes from overseas sales. When analyzing your own portfolio make sure to investigate where the revenue streams of the stocks you own come from. It will quickly become clear if you are overexposed to one specific region. 

Not only does geographic diversification reduce the risk of being over-reliant on the continued success of one economy, but it also presents some unique opportunities. Different parts of the world move at different rates, and emerging markets like Latin America, South East Asia, and Africa are all developing at breakneck speeds at the minute, which means high-risk high-reward for investors. Here is my favorite emerging market stock right now:

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MercadoLibre

MercadoLibre (NASDAQ: MELI) is probably a name you've seen popping up from time to time, mostly because it's been one of the best-performing stocks on the Nasdaq (NASDAQ: QQQ) year-to-date. The Latin American e-commerce and payments company has been on a tear, up 75% since the start of the year. Its operations cover an online marketplace, payments, shipping & logistics and it's consistently been growing its market share and revenue at a rate of knots. It just pipped StoneCo (NASDAQ: STNE) and Sea Limited (NYSE: SE) to the top spot of my favorite emerging market stocks, and here's why: 

• It's the leading e-commerce service with a rapidly growing total addressable market. MercadoLibre covers 18 countries across Latin America and the Caribbean, where internet adoption is becoming the norm. By establishing itself as the go-to solution, it's customer base will continue to grow. 
• Its MercadoPago payments solution is growing rapidly in popularity in a region that is severely underbanked and dependent on cash.
• Its MercadoEnvios logistics solution makes it easier for merchants to ship their products, while simultaneously turning one of its biggest expenditures into a revenue generator. Tactics which made Amazon (NASDAQ: AMZN) a trillion-dollar company. 
• It has over $2 billion in cash to continue its expansion and batten down the hatches when Amazon comes knocking on the door.
• It's got industry stalwarts like PayPal (NASDAQ: PYPL) backing it.

E-commerce stocks are going through a bit of a purple patch at the minute as the global pandemic has brought the importance of their service to light. Companies like Shopify (NYSE: SHOP), Amazon, and Etsy (NASDAQ: ETSY) have all seen a huge uptick since the start of the year as people become acclimatized to a new way of living. It's tough to see people shunning the convenience of e-commerce when this global pandemic is a thing of the past, and the opportunity to invest in a company that is growing rapidly, consolidating its supply chain, and developing a range of ancillary services in one of the most exciting regions in the world right now is too good of an opportunity to miss. I'm an investor in MercadoLibre and will be for a very long time.

MercadoLibre will report its Q2 earnings on later today, Thursday 28 July.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above Read our full disclosure policy here.