Want a broad-based investment tip? Find out where the wealthy put their money and put yours there too.
Take, for example, the private banking clients of JPMorgan. A Private
Banking "client" is a Wall Street euphemism for "rich." JP Morgan is
telling its wealthy private banking clients to invest in emerging market
equities and currencies such as the Indonesian rupiah and Indian rupee.
The Indonesian rupiah may be a bit of stretch for average investor's
risk tolerance but the point we're making is that if you want to rebuild
your shattered investment portfolio in this lifetime you're probably
going to have to look overseas for any decent return. The U.S. markets
are still climbing out of a "lost decade" and are now only back to where
they were ten years ago. They're stuck in what financial experts call a
"trading range," and there's no telling when they'll break out of it.
Emerging markets outperform U.S. markets
Emerging and frontier markets on the other hand are skyrocketing.
Russia was up 129% last year and Sri Lanka had a year-to-date gain of
92% as of September 24 according to the MSCI, Inc. frontier index. Many
American investors already invest in overseas markets just by buying
shares of multinational companies. These days, three of the world's top
five companies are headquartered in emerging markets and ten of the top
20 mutual funds invest in developing nations.
Consider this. According to Ibbotson Associates research, if you had
invested $10,000 in the S&P 500 ten years ago, it would be worth
only about $9,800 today. But if you had put the same amount in an
international stock portfolio split between emerging and developed
markets, your investment would have nearly doubled.
Still, on average, American investors have about 90 percent of their portfolio in U.S. securities.
We have to get used to the idea that the U.S. is no longer the global
economic power it once was. A weak dollar coupled with a slow economy
has put a serious drag on market performance. Moreover, emerging markets
represent more than 70% of the world's population or four times that of
developed markets and countries like India and China are seeing a surge
in middle class consumerism.
Where's the real risk?
Jerome Booth is the head of research at Ashmore Investment, a
UK-based emerging market fund. He's quoted in The Wall Street Journal as
saying "people used to think emerging markets were far riskier than
developed markets. But the credit crunch has shown that western markets
are just as risky, and just as exposed to risks like weak corporate
governance and political interference."
That doesn't mean there isn't risk in foreign markets, especially in
what are known as "frontier" markets in Africa, the Middle East and the
former Soviet Union, where you run the risk of political instability and
corruption, where bribery is a normal business expense. There are also
potential economic challenges such as China slowing its growth to avoid
inflation or debt-ridden European nations cutting spending to the point
they slide back into a recession.
Volatility abounds in some of these markets, but over time many of
them have grown while the U.S. market, which has its own struggles with
volatility, hasn't grown nearly as much. The key with global investing
is to think long term.
A recent nationwide survey of mass affluent investors by Allianz
Global Investors (AGI) and GfK Roper Public Affairs and Corporate
Communications found that most (71%) are looking for the best investment
they can find and don't care whether it is foreign or domestic. The
survey, which was conducted in August, found only 42% said they were
confident they'll reach their long-term financial goals compared to 53%
in April and nearly two-thirds (63%) believe a major stock market
downturn is at least somewhat likely in the next year, compared to 53%
Investing in the right foreign markets
Investing correctly, in the right foreign markets, could make the
difference between a meager performance and a solid one. Try to find a
trusted financial advisor who will recommend the appropriate allocation
and then the best balance of investment vehiclesâ€”mutual funds, ETFs,
foreign securities, or shares of U.S. companies with global operations.
Some financial advisors are recommending clients allocate between 20 and
35% in emerging markets and even more if the client is younger. That
may be a little extreme for older and more conservative clients, but
they would also benefit from having some of their portfolio in foreign
stocks, even if it's just five or ten percent.
So now that you're at least thinking about investing in other
markets, how do you go about doing that? Again, talk to a financial
advisor. Ask them what kind of international investments are available
and right for you.
One of the best ways to enter foreign markets is through mutual funds
and Exchange Traded Funds or ETFs. Not all foreign stock funds perform
the same way and may not give the robust returns you'd expect. Some
international funds are overly invested in large European or Japanese
companies and have little exposure to the fast-growing emerging markets.
On the other hand, relying too much on those red hot developing markets
like Brazil, India and China can expose your portfolio to more risk
than your tolerance can handle.
You also have a choice between global funds or an international or
foreign fund. A global fund can invest anywhere in the world and depends
on where the fund's management team sees the best opportunities. Many
global funds will have holdings in the U.S. as well as overseas which
means you'll get the broadest possible diversification available in a
single investment. An international fund, however, invests only outside
the U.S. and therefore is likely to be more volatile.
As with domestic funds, you want to be aware of sales charges. If
you're seeking low cost alternatives, you may want to invest in an
overseas index fund or ETF (exchange-traded fund). These investments
offer some of the same advantages as a mutual fund, but have
significantly lower costs because they are not actively managed.
More sophisticated investors may want to consider foreign equities.
Just as one of the basic principles of successful investing is
diversification by spreading your investments across different
industries, investing beyond borders is merely an extension of that
The underlying concept is that you're taking advantage of the
superior growth of other countries and there are two primary ways to do
this with stocks. You can either invest in companies located in other
countries or in U.S. companies that do business internationally and
derive much of their revenue from overseas. In fact, investing in
companies like Apple, GE, and Avon, who do business in nearly every
country on the planet, is about as global as you can get in terms of
taking advantage of the world's economies.
Another option for investing in international stocks is to buy an
American Depositary Receipt, or an ADR. These are shares of a foreign
stock held by a U.S. bank. ADRs are traded on U.S. stock exchanges and
allow U.S. investors to buy foreign stocks without having to deal with
foreign currencies, the expense of opening an additional account or
higher commissions, and foreign banks, not to mention other possible
barriers such as language and different time zones. Any gains and losses
will appear on a 1099 form that you will receive at the end of the
Older investors, who prefer the more conservative fixed income
investments, may want to look at emerging market bonds. Take Brazil for
example. Its debt to gross domestic product ratio is lower than that of
the U.S. and Brazil's 10-year local currency bonds yield 12.3 percent,
compared with 3 percent for U.S. Treasuries.
The key to foreign investing is to not try it alone. If you're going
to invest in foreign markets, work with a financial advisor who
understands the risks, rewards and complexities of the global