Hi All,
Its the eve of whats supposed to be one of the biggest snowstorms of the season here in DC, so I’m hunkered down at home with some hot coffee.
Following our posting yesterday, today’s theme is putting your money abroad. By putting your money abroad, we mean putting your US dollars into investments that are not inside the United States, but may be dominated in US dollars.
Why would you want to do this?
1) Returns: Countries like China, Brazil and Russia have seen stronger growth than that found here in the U.S. Stronger growth can mean more returns for you. More returns means more money, fewer hassles and less stress.
2) Diversification: Most of the time when people say diversification, they refer to owning a wide variety of U.S. stocks. But, diversification can also mean having holdings across asset classes and across countries as well. So, if you own outside of the U.S. you’ll build some additional safety into your portfolio.
Okay, so you’re sold, but how would you go about investing abroad? Well, there are huge regulatory differences between the US and the developing world, so while its generally better to do investing yourself, in this case you might want to consider a mutual fund. In looking a funds, you have several options:
1) Single Country Funds: These are essentially mutual funds which confine themselves to a specific country. If you want to get started on this, Seeking Alpha has nice list of funds to look at. With this class of assets you’ll want to be sure that you’re getting the assets a discount to the funds portfolio value. The reason here is that markets in some developing countries can be thin (e.g. not a lot of buyers and sellers) so you want the extra safety of a built in discount.
2) Global, International and Regional Funds: The main idea between this class of funds is they invest your money back and forth between US and other stock indexes depending on the fund manager’s judgement of how well local markets are performing. Global funds can buy both US and international stocks, whereas international and regional funds tend not to buy American equities. The USA Today has some a list of some suggestions if this asset class looks right for you (click here).
3) Foreign Bond Funds: Most people buy foreign bond funds to lock in a higher yield than currently paid by US bond funds. The major problem with this is that foreign bond investors often get bitten by fluctuations in the value of the dollar. When the value of dollars go up then your international bonds are worth less. For Joe and Jane average its difficult to invest successfully in this asset class because you have to predict the value of interest rates, currency and international trade patterns! This is hard enough in one country, let alone two or more.
4) Foreign Currency Funds: These are basically mutual funds that buy foreign currencies. While these funds do earn interest, they make their money when the dollar declines. This means, they tend not to do as well when dollars increase against other currencies. Foreign currency funds also tend to charge higher fees than other funds. If you want to a good foreign currency fund, check out fidelity.
As a closing note, you may not have to buy a specialized fund to get international exposure. Many US companies operate internationally. Blue chips like Coke, IBM, Procter and Gamble and McDonald’s all operate outside of the United States and are impacted by foreign economic conditions and currency fluctuations. Also, you can buy stocks in many Canadian companies directly just like you would any US equity. Finally, some banks offer foreign currency accounts. So, you have lots of options to chose from if mutual funds aren’t for you.
Happy Investing.
James
Yes, it's very easy to get exposure to international growth thru multi national companies. My favorite is Philip Morris Int'l (PM) – I wrote a blog post today about a unique way to play PM.
Good luck in your ventures abroad! Kinda volatile with lots of beta, but it'll be a fun ride if you bet the right way!
A few points:
1. If you want to buy European, Canadian, Australian, Hong Konger, Indian, and Japanese stocks, as well as US stocks, I strongly recommend Interactive Brokers, which I've used since 2006.
2. There are indeed a LOT of non-US stocks that have excellent potential. And since most non-US people, like their American counterparts, have the "home bias," it's a sound bet that the US share of market cap is going to go down as non-US economies increase their share of "global GDP."
Having said that… beware of the "value trap" (as Jeremy Siegel calls it). If (e.g.) China's economy outperforms the USA's dramatically, that doesn't mean buying (e.g.) Chinese stocks is the best approach to taking advantage of this. It's certainly possible that investors have already priced in China's growth whereas Philip Morris's ability to sell cigarettes to the Chinese (or Nike's ability to sell shoes to increasingly affluent Chinese consumers) isn't similarly factored in. In other words, you still have to pay attention to an individual stock's valuation, not just to a country's prospects.
3. It's "Procter" not "Proctor".
And yes, I'm the same anon who pointed out that it's F-A-V-R-E.
Hey Anon,
Thanks for pointing out the misspelling. I always kick myself when those sorts of mistakes are made.
-James