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Investing Internationally

If domestic stocks are performing well, why invest elsewhere?

It’s easy to invest in something you are familiar with.  I think that is one reason investors are often found guilty investing a large portion of their 401k in their own company’s stock, or maybe they buy other companies’ stock within the same industry.  Similarly investors can make the mistake of just investing in domestic stocks, we refer to this behavioral finance issue as home bias.  Especially if we have a year like 2014 when domestic stocks performed so well, one may ask, why invest elsewhere?

When the S&P 500 is returning double digits, it may seem unnecessary to include shares from foreign companies in your portfolio. Investors may not realize that this perceived feeling of security comes at the expense of potential missed opportunities abroad.  Just as we know that concentration in one company or industry can be risky, the same applies to investing in just one country.

Markets go through different cycles. Foreign equity markets have lagged ours recently. The U.S. has looked like the proverbial “best house in a bad neighborhood.” When the emerging markets are hot, however, they can outperform the S&P 500 dramatically. During those periods, investments offering exposure to those markets carry the potential to yield more than investments merely tracking the S&P. Even when the U.S. stock market is flat or down, overseas markets may be up.

Outside of America, there are some companies with great potential. We hardly have a monopoly on innovations and fresh ideas, and sometimes overseas firms rise to set the pace for a particular industry. Or, a foreign firm may be able to adapt and market an idea from our shores with amazing success in Asia or Europe.

Emerging markets are still capable of rapid growth. As examples, consider the BRICS: Brazil, Russia, India, China and South Africa. The economies of all five of these countries expanded by 40% or more from 2003-13. China’s annual gross domestic product grew 164% over that period and India’s annual GDP roughly doubled. Growth from China alone now represents 15% of the world’s GDP.1

At some point, this kind of growth has to moderate. In Russia and Brazil, it definitely has – but the International Monetary Fund still projects China’s 2016 GDP at 6.3% and India’s 2016 GDP at 6.5%. That is more than twice our present pace of economic expansion. China’s economy has grown by at least 6% annually since 1983 – a run unequaled in modern economic history.1,2

International investing affords opportunities for diversification. Just as a portfolio can be too concentrated in one or two asset classes or sectors, investing entirely in domestic companies may be limiting when the U.S. stock market cools. During those times, exposure to overseas markets may help to improve an investor’s return.

Make no mistake, there are significant risks to investing internationally. Many emerging markets are far less stable than ours and wild swings may occur. Not only that, what happens in one stock market now tends to affect many others – there is much more of a “ripple effect” today than in decades past. Along those lines, a major market shock from a geopolitical event may affect overseas markets more profoundly than our own.3

Liquidity is another issue. Some foreign stock markets look a little “Mom and Pop” compared to Wall Street, having thinner volume, shorter trading days and a much lower number of listed firms. Investors can also be left wanting for information. While American corporations disclose many facts, foreign firms may be less compelled to do so by a particular country’s laws.3

Exchange rates come into play. A strong dollar eats into the return from international investing; a weak one can help boost the return. Also, keep in mind that foreign firms trade and issue dividends in the currencies of their respective nations or economic zones, not the dollar. This means that an investor has to exchange investment dividends (and proceeds) into dollars.3

Fees for overseas investing may be higher, too, as it may cost a little more for a U.S.-based brokerage firm to do business on other continents. Some investors may even encounter withholding taxes on dividends, or premiums for buying certain types of shares.3

Weigh both the opportunity & the risks of international investing before you proceed. Talk with your financial advisor about the possible merits and demerits of this approach.

 

Citations.
1 – bloomberg.com/bw/articles/2014-07-21/brics-summit-a-show-of-economic-might-is-nothing-to-fear [7/21/14]
2 – bloomberg.com/news/articles/2015-02-09/bric-becomes-i-with-india-set-to-outperform-first-time-since-99 [2/9/15]
3 – sec.gov/investor/pubs/ininvest.htm [3/6/15]

This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This material was prepared by MarketingLibrary.Net Inc., for Mark Lund, The 401k Advisor, Investor Coach and author of The Effective Investor.  Mark offers investment advisory services through Stonecreek Wealth Advisors, Inc. an independent, fee-only, Registered Investment Advisor firm providing 401k consulting for small businesses and financial Advisor services for professional athletes and individuals.  Stonecreek is located in Salt Lake City, Murray, West Jordan, Sandy, Draper, South Jordan, Provo, Orem, Lehi, Highland, Alpine, American Fork all in Utah.

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