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International Investing: Broaden Your Horizons
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It has been hard to read recent news reports without mention of challenges abroad: government austerity measures sparking unrest in Greece, an Icelandic volcano disrupting air travel, concerns about a real estate bubble in China. Although these situations can cause legitimate concern, it's important to stay focused on the potential benefits of international investments, which can help U.S. investors diversify their portfolios and capture pockets of outperformance.
Between 1970 and 2009, the percentage of the world's investment opportunities headquartered outside of the United States increased from 34% to 59%. Some observers believe that by 2030, the U.S. stock market will represent only 32% of the world market, with the vast majority of opportunities based offshore.1
Diversification Benefits
Because international markets do not always move in sync, diversification on a global scale may help offset the effect of a downturn in the U.S. market. Investors in international securities may face additional risks, such as higher taxation, less liquidity, political problems, and currency fluctuations, which have less of an impact on domestic investors. But despite these risks, the potential for higher returns and diversification makes these markets attractive to many U.S. investors.
U.S. and foreign stocks have taken turn out- or underperforming one another during different periods. During the mid-1980s, foreign stocks significantly outperformed. Then during much of the 1990s, domestic stocks excelled. Since 2002, foreign stock indexes have generally outperformed domestic securities. A portfolio diversified with both domestic and foreign stocks can help smooth these differences over time.2
When measuring the diversification benefit of international investments, domestic investors frequently look at a statistic known as correlation, which measures the historical tendency of two investments to move in tandem in response to economic or market developments. Traditionally, foreign stock performance has had a relatively low correlation to domestic stock performance. As different economies and financial markets become increasingly interconnected, correlation between foreign and domestic stocks has risen. The correlation between returns of domestic stocks (S&P 500) and foreign stocks (MSCI EAFE) increased from 0.54 for the 10 years ended December 31, 1999, to 0.87 for the 10 years ended December 31, 2009.3
Developed Versus Emerging Markets
When allocating a portion of a portfolio to international investments, investors have a choice between developed and emerging markets. Developed markets include countries with mature and relatively stable economies, such as many Western European nations, Australia, and New Zealand. Emerging markets are lesser-developed countries, such as China, India, and Brazil. Generally, characteristics of these countries include a growing population experiencing a substantial increase in living standards, rapid economic growth, and a relatively stable currency. Emerging markets can be volatile and are considered appropriate only for long-term investors with an investment time frame of 10 years or more.
Movement in the value of the U.S. dollar compared with foreign currencies will affect returns of foreign investments held by U.S. investors. In general, when U.S. investors purchase foreign stocks or mutual funds, their returns are likely to decline when overseas currencies fall relative to the U.S. dollar. During 2010, as sovereign credit risk has pressured the euro and other foreign currencies, U.S. investors have experienced this negative currency translation. During 2009, the opposite trend was in effect when a weak dollar helped fuel strong international performance.4
Your financial advisor can help you determine the allocation and the investment vehicles that are most appropriate given your current situation.
1 Source: Standard & Poor's, as of December 31, 2009. Estimate for 2030 is based on the rate of growth in foreign markets since 1970.
2 Sources: Standard & Poor's; Morgan Stanley Capital. Based on rolling 36-month performance periods from January 1, 1980, through December 31, 2009. U.S. stocks are represented by the S&P 500, foreign stocks by the Morgan Stanley Capital International Europe, Australasia, and Far East (EAFE) Index. Past performance is not a guarantee of future results. Investing in stocks involves risk, including potential loss of principal. Foreign investments involve greater risks than U.S. investments, including political and economic risks and the risk of currency fluctuations, and may not be suitable for all investors.
3 Sources: Standard & Poor's; Morgan Stanley Capital. Based on annualized returns.
4 Source: "Dollar Drag," Standard & Poor's International Investment Outlook, May 17, 2010.
© 2010 Standard & Poor's Financial Communications. All rights reserved.
© 2010, Kelly Ruggles, Spokane, WA. Web site
Kelly C. Ruggles, Spokane, WA. is a fee-based financial planner located in Spokane.
Kelly C. Ruggles, Spokane, WA. President of American Reliance Group, Inc., a registered investment advisor.
Kelly Ruggles, Spokane, WA. is the author of "The Financial Playbook" for Retirement
Kelly C. Ruggles, Spokane, WA. Does not intend to provide personalized investment advice through this publication and does not represent the strategies or services discussed are suitable for any investor. Investors should consult with their financial advisors prior to making any investment decisions. |
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