DON'T GO SOUR ON GLOBAL STOCKS
TERRY SAVAGE email@example.com Oct 22, 2009
Don't rule out the use of international investing to diversify your stock portfolio. Just drop the idea that global markets are not intimately connected.
Updated: May 3, 2013 12:14PM
Since stock markets around the world all "crashed" at the same time, what's the point of international investing?
A. That's a question a lot of people are asking themselves these days. International investing always was seen as a way to "diversify" risk in an investment portfolio -- on the theory that if the stock market fell in the United States, markets in other counties would take up the slack. In hindsight, that theory seems not only wrong, but impossibly naive.
But don't rule out the use of international investing to diversify your stock portfolio. Just drop the idea that global markets are not intimately connected. Now the reason for international diversification is that markets outside of the United States account for about half the value of all stocks traded. And the odds are that some of them will turn in a performance that exceeds our domestic averages.
For example, from the market lows in early March through the end of August, the S&P 500 rallied 51 percent. But during the same period, the Hang Seng index in Hong Kong was up 73.9 percent, the Bombay Sensex index was up 92 percent, Mexico's Bolsa index gained 65.8 percent, and the Spanish IBEX 35 index rose 66.5 percent -- to name just a few of the global markets that outrebounded the United States.
You're probably thinking it's tough enough just trying to figure out which U.S. stocks to buy, much less worrying about other global markets. But there are some easy ways to add international exposure to your investment portfolio:
?Global U.S. companies. You probably aren't aware of what a great percentage of earnings of many U.S. companies comes from international operations. For example, Coca-Cola gets more than 80 percent of its earnings from outside the United States.
?International mutual funds. Morning star.com lists hundreds of mutual funds that take an international approach to investing. You can search by geography or performance. Some of these funds buy only large, diversified, internationally based companies, while others specialize in "emerging markets." And all major fund management companies, such as Fidelity, Vanguard, American Century and T. Rowe Price, have a wide assortment of international funds. They are typically priced daily, and there is no commission to purchase them, although there are ongoing management fees.
?Exchange Traded Funds. ETFs are fixed portfolios of companies, with the shares of the portfolio listed on major exchanges. When you buy or sell the shares, you'll pay a commission to the broker, with the amount depending on the firm you use and the size of the transaction. Many ETFs specialize in companies listed in one country, such as Japan, or stocks of a region, such as Asia or Africa, or even a certain category within a region, such as emerging markets. At Morning star.com, you can use the ETF "Screener" tool to find ETFs that give you specific exposure.
Of course, you always could buy shares of individual companies traded on foreign exchanges -- but that has been a complicated and expensive process. A relatively few large foreign companies have shares traded on U.S. exchanges, in the form of ADRs (American Depository Receipts). But for most international purchases, it has been difficult for the average investor to not only organize the transaction, but to gain reliable information.
Now, Fidelity Investments is offering investors a new online trading platform for international securities. It allows real-time quotes and online trades in 12 global markets and eight foreign currencies. And the trading capability is backed up with a wealth of research and educational materials.
The new Fidelity international online trading service is designed for sophisticated investors, frequent traders and financial advisers. Fidelity says most investors will be well-served by using its international funds or brokerage services to buy ETFs.
But Fidelity's huge commitment to real-time global trading does illustrate the growing importance of international diversification.
As Walt Disney said, "It's a small world, after all!" And that's The Savage Truth.
Terry Savage is a registered investment adviser. Distributed by Creators Syndicate.
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