Looking To Diversify? Try a Trip Overseas
By Megan E. Corcoran
The recent volatility in the U.S. stock market probably has
you thinking of ways to diversify your portfolio--so why not
let your money take a trip overseas? International investments
are a great way to expand your portfolio and get the diversity
you need to weather most economic storms.
"No one region gets all the excess returns over long time
periods," says Chris Wolfe, global equity strategist at J.P.
Morgan. "History points to the wisdom of international diversification,
so it's smart to take advantage of various political and geographical
spheres, because if you are only investing in the U.S. you
are only availing yourself to one set of opportunities."
Wolfe illustrates his point by comparing market index performances
over past decades--Japan's compound annual growth rate was
9.3% in the 70's, compared to a meager 0.3% in Europe and
a sluggish 2.4% for the Standard & Poor 500 in the United
States; and in the 80's, Japan and Europe outperformed the
U.S. with compounded annual growth rates of 20.8% and 15.3%
respectively, compared to the S&P 500's 12% growth rate. Furthermore,
according to Morgan Stanley Capital International, the U.S.
market has been among the world's top five performers in only
four of the past 20 years.
But Wolfe stresses that geographic diversification isn't
effective if it's concentrated in one industry, since an industry
correction can be global in scope--witness the technology
sector's recent worldwide dive. "It's important to have sector
diversification, as well as international diversification,"
says Wolfe, and it's important to invest long-term, at least
five years, to realize significant benefits.
Luckily, right now globalization, deregulation, and technology
are creating tremendous investing opportunities in the strengthening
economies of Eastern and Central Europe, Russia, Latin America,
India and China, as well as the growing markets in Europe
and Japan.
"There's a whole world of opportunities outside the U.S.
and some very important long term trends emerging that will
create some significant investment opportunities for the years
to come," says Henrik Strabo, chief investment officer of
international equities at American Century World Mutual Funds.
His International Growth Fund (TWIEX) has returned 52.8% over
the past year and 27.7% over the past three years, although
it's down 6.2% year-to-date.
"There are powerful long term trends taking place in non-U.S.
markets that have already occurred in the U.S.," says Strabo.
Managers are increasingly being paid based on performance
and profitability, and they own equity through stock options,
so management's interests are more aligned with investors'
interests. Moreover, the creation of the Euro-currency is
expanding the European market and allowing European companies
to compete with the rest of the world from a larger base.
And entrepreneurship is mushrooming outside the United States.
If you agree that it makes sense to put your money to work
overseas, the next question is what investment vehicle to
use. You have a couple of options, but the best and easiest
way to invest overseas is through mutual funds. Mutual funds
are much simpler to buy than individual non-U.S. stocks and
don't have the added nuisance of currency fluctuations and
obscure tax ramifications. And since investing in other countries
requires access to information about the local markets, you
really need the professional investment advice and local market
expertise that mutual fund managers provide.
You could pick individual stocks, but it's difficult to research
non-U.S. companies because of different reporting and accounting
standards, currency issues, and a whole host of other variables
that investors aren't used to dealing with in the U.S., says
fund manager Strabo. "I get out and travel and meet with companies
to kick the tires," he notes.
There are global, international, and regional mutual funds
that allow investors to target a specific region or type of
company; and there are index funds that give investors a finger
in every pot. Whichever method of investing you choose, a
well-diversified portfolio should have anywhere from 10%-25%
foreign holdings, depending on your risk tolerance. So, once
you decide what percentage of your portfolio should be overseas,
identify which markets appeal to you and then invest consistently
until you reach your allocation goal.
|
