A primer on how to make overseas investing work for you
If you’ve heard about the turmoil in overseas markets -- the demonstrations in Greece, the Federal Reserve Board’s investigation of Wall Street’s role in hiding the debt crisis there and talk of a possible default -- then I’m guessing you’re a tad worried about what all this might do to your investments.
But here’s the thing: In investing, you can’t shut the world out. And you really don’t want to.
Because, despite turmoil, the world is where the growth is.
And it’s much larger than we are. The U.S. today remains the world’s largest economy, but it is only about 25 percent of the world’s economic ouptput.
Even if you wanted to keep your money invested only in U.S. companies, you’d be exposed to overseas markets. The largest U.S. firms have been increasing their sales outside the U.S. to almost 48 percent of total revenue, says Standard & Poor’s. More firms are shifting “labor, capital and resources to foreign countries, where a growing worldwide middle-class is emerging,” said S&P’s Howard Silverblatt, senior analyst.
It’s hard to believe anybody can outspend us, but, J.P. Morgan estimates that consumers in emerging-market countries - such as China, Brazil and Mexico -- will be responsible for 34 percent of worldwide consumption this year. That compares to 27 percent for U.S. consumers.
And step back a bit and look at it this way: We’re coming off the first year since World War II when the world’s economies, as a group, declined. At the same time, emerging market stocks last year were on a tear, with markets in Brazil, Russia and India each gaining more than 100 percent.
So where can investors go at this point? As growth begins, the rest of the world, not the U.S., will take the lead. The International Monetary Fund expects the U.S. economy to grow by 2.7 percent this year. But China’s growth rate will be 10 percent, India 7.7 percent, Brazil 4.7 percent, Mexico 4 percent, Russia 3.6 percent.
“You want to start having exposure to them as they are emerging, but you also want to be remembering bubbles,” said Certified Financial Planner Laura Walsh of Lifespan Financial Strategies in Weston.
Walsh’s suggestion: If you don’t want to spend your life monitoring country-by-country situations, set a fixed percentage of assets to allocate to world markets and stick to it. If you stick to it, you’ll be forced to sell when a market makes a strong move up. That’ll make it far less painful when one region makes a strong move down.
You do have to prepare yourself for more volatility than in U.S. markets. Because while you might have enjoyed that 113 percent return on Latin American mutual funds last year, the two-year return in that same sector was a 7.4 percent loss.
The actual percentage you send to world markets is up to you and your comfort level. Walsh says a decade ago, Wall Street firms probably would have limited international exposure to 8 percent or 12 percent of your stock portfolio, but today, 20 percent to 30 percent is common. “Typically, it’s between 20 and 40 percent of your equities,” said Fran Kinniry, a principal at Vanguard and a senior member of its investment strategy group.
And spread it around, from developed economies to emerging markets. Vanguard tends to match the proportions of world markets, so developing countries make up 85 percent of those foreign investments and emerging markets, the other 15 percent.
Almost all 401(k) plans today have international choices, so it’s not too difficult for investors to find suitable funds.
But how do you avoid the problems in Greece or debt issues spreading to other shaky European nations? You can’t, if you invest broadly in world markets. But keep in mind: The U.S. has its own debt problems and many, in politics, would argue our situation is far worse.
As Kinniry pointed out: “If you put the two together in a diversified portfolio of U.S. stocks and international stocks, you will actually lower your risk than if you just had one or the other.”POSTED IN: Your Money (256)