Investing Globally: The Risks & Benefits of Foreign Stock Diversification
by Alexander Green, Oxford Club Investment Director
Monday, April 27, 2009: Issue #985
A few years ago, I was on a panel on investing globally at a financial conference in New York.
The moderator asked each of us what percentage of a U.S. investor’s stock portfolio should be diversified into international markets.
Answers varied. But the fellow next to me – who specialized in insurance and annuity products – had a definite point of view.
“I’ll tell you right now,” he said in a loud, confident tone, “I wouldn’t buy international nuthin’.”
As you might expect, this elicited a few chuckles from the audience.
Investing Globally – The Risks Involved
But this panelist was dead serious, and he pointed out political risk, economic risk and currency risk. And he summed it all up by proclaiming there was plenty of investment opportunities right here in the “Good ol’ U.S. of A.”
It was my turn next. But before I offered my opinion, I asked my fellow panelist if I could ask him a few questions.
He agreed. And over the course of the next couple minutes, we learned that first thing every morning he got out of his Scandinavian bed, turned on his Mitsubishi TV and brewed a pot of Brazilian coffee.
Then he dressed himself – in his shirt made in China and his Italian loafers – and put on his Swiss watch before climbing into his BMW and motoring off to work (on a tank of Canadian petrol he filled up at his local Phillips 66 station).
Despite all the global businesses he was patronizing, he felt confident he was buying “international nuthin’.”
Come on. Americans can reasonably put up to half of their stock portfolios into international markets. And here’s why…
5 Reasons You Should Begin Investing Globally
Here are five reasons why you should begin investing globally:
- The United States makes up slightly more than a third of the world’s total stock market capitalization. Two thirds of the opportunities are overseas. Why limit yourself?
- Many nations are growing faster than the United States. Take China, for example. Growth is expected to slow down to 6% this year. Could you imagine how good business conditions would be here if we had 6% GDP growth?
- Valuations are often better in foreign markets. If foreign stocks are cheaper and dividends are higher, returns going forward are likely to be better.
- Currency diversification. You might have noticed that the almighty buck has been looking a lot less triumphant in recent years. That means securities denominated in other currencies are worth more in dollar terms.
- Risk reduction. True, the foreign component makes international markets themselves more volatile when measured in greenbacks. But blend foreign securities with our domestic ones and the result is your portfolio as a whole is less risky, not more.
Let’s also not forget that there have been plenty of economic problems at home. The subprime crisis started right in our own backyard. The recession is global, but it was the U.S. financial system that buckled first.
As for political risk, take a look at how our misrepresentatives in Washington are spending money now. They’re throwing around numbers that only astronomers should use: trillions.
Who can say how this new expanding role of government will play out – or what effect it will have on our currency?
In short, you should diversify up to half of your stock portfolio into international markets for three very good reasons:
- Greater opportunity,
- Higher returns,
- And less risk.
Good investing,
Alexander Green
Editor’s Note: Alex’s New Frontier Trader service capitalizes on emerging markets – where growth will happen fastest, and the profits will be the greatest – countries where 180,000 new consumers a day are opening up their wallets. You can find out about the New Frontier Trader.
Today’s Investment U Crib Sheet
Asset allocation refers to spreading your investments among different asset classes, not just different securities or market sectors. Doing this has allowed us to survive, prosper and build our wealth during the longest bear market since The Great Depression.
We’ve had money invested over the last five years in foreign stocks. While the stock market has gone down, these have gone up. We’ve also had money invested in six other asset classes. And over that 5-year time period we’ve beaten the S&P’s return.
Because different asset classes are imperfectly correlated – some zig while others zag – our model (as shown below) allows you to boost returns while reducing your portfolio’s volatility.
In layman’s terms, proper asset allocation means you can sleep better – knowing that the daily fluctuations of the market will have little impact on your financial security.
Following this model and rebalancing annually ensures our portfolios will be well diversified and positioned to profit in any market condition. And yes, investing success can be this straightforward.
Learn more about The Oxford Club’s asset allocation model.
If you’re looking at your portfolio, and finding that your exposure to foreign stocks isn’t near enough to 30%, take a look at Alex Green’s New Frontier Trader service.
- Emerging Markets: 180,000 New Investment Opportunities… A Day
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