May 31, 2008

How much of your money is in domestic stocks? What percentage of your portfolio is invested internationally? If youre like many average investors in the US the majority of your investments are in US companies.

Global Investing Seminar

I attended a seminar on global investing yesterday and it really made me think a little harder about our current exposure to international investments. I had to keep in mind it was presented by a financial company that runs a global fund, so the point of the seminar was to reinforce the importance of international investing in the minds of current and potential investors.

However, they did cover some interesting statistics that apply no matter what investment vehicle you use to diversify overseas. They fed us lunch so I didnt get to write down all the statistics since I was busy feeding my face but I still remember the general concepts.

Global Growth Trends

One of the graphs was from a Morgan Stanley study that looked at the total value of US public companies compared to the total value of international companies. The graphic showed the value in approximately 20 year time intervals: 1988, 2008, and 2030 projected.

I wish I had the exact numbers but the overall trend showed a global economy that was dominated by American companies in 1988, maybe about 2/3 of the global corporate value was in the US, but the estimates for 2030 approximated US companies making up only a quarter of corporate capital markets.

Of course the numbers arent exact but I think the trend is definitely accurate and that the US position as the worlds financial superpower is slipping. While this may not be great news for us as consumers or workers, it does present an opportunity for us as investors.

Evaluating International Markets

The speaker worked for a global fund, his role is to fly around the world visiting and evaluating companies that the fund is considering putting money into. He walked us through his funds investment positions in the various global regions, explaining their reasoning behind being underweight in places like Great Britain and overweight in places like Taiwan and South Korea. He definitely pointed to Asia as the region with highest potential for growth over the next two decades.

He gave some staggering statistics on the sheer size of the Chinese consumer and business market and the enormous potential for growth there. He also commented on the enormous currency reserves the Chinese government has built up and all the money they need to spend on infrastructure.

However, the speaker went on to warn us that the Chinese markets are overpriced, in his opinion, due to a massive runup in the stocks of Chinese companies over the last few years. He had the same caution for stocks in India, that the price earning (PE) valuations were higher than they wanted to pay. His company is looking for opportunities in areas like Taiwan or South Korea where the PE ratios are much lower.

Risks of Investing Internationally

The truth is we live in a global economy and changes around the world can effect how US companies perform so even domestic investments are influenced to an extent by international markets. However, if you decide to put your money in a foreign company your investment is suddenly influenced heavily by regional events, currency fluctuations, and the policies of the foreign government.

If youre investing in an emerging market where there is large amount of growth theres also typically a lot of change both economically and politically that can potentially put your investment at risk. Although there are risks associated with global investing, in my opinion they are definitely worth the opportunity to benefit from the growth in economies around the world.

You wouldnt want to put all of your money into international companies, just make them a part of your investment portfolio. Several years ago about 10% of our portfolio was in international funds when I increased it to around 15% and now Im looking to raise the percentage even higher. How much exposure you want to international markets is up to your situation but its definitely something you should at least look into.

How to Invest Internationally

So how can you put your money into companies overseas? The easiest way is to buy an international ETF or mutual fund. The approach I decided to take several years ago was to invest in multiple international funds. I choose an option from my 401k, Dodge & Cox International Stock (DODFX), one from my wifes 403b, American Century Intl Growth (TWIEX), and also opened a non-retirement account with Oakmark International (OAKIX).

Dodge & Cox International Stock has done the best for us. American Century Intl Growth has been decent but nowhere near the performance of the Dodge and Cox fund.

Oakmark International had been going gangbusters until last December when it took a big hit. I had been debating between the Oakmark fund and the Vanguard Total International Stock Index Fund (VGTSX) back in early 2003.

Our financial advisor recommended Vanguard but I went with Oakmark instead. As the graph shows, Id be wealthier if Id have listened to her, I guess hindsight is 20/20. The Total International Stock Index Fund is actually composed of investments in three other Vanguard international indexes:

• Vanguard European Stock Index Fund
• Vanguard Pacific Stock Index Fund
• Vanguard Emerging Markets Stock Index Fund

The fund is a simple way to gain exposure to a variety of markets all over the world. There are many other international funds available so you have lots to choose from.

One other option Im considering for investing overseas is opening an account with ETrade to take advantage of their online global trading. This would be a different approach than the mutual fund route which would require more research and carry more risk. It would allow me to invest directly in companies in Canada, France, Germany, Hong Kong, Japan and the United Kingdom.

International Investing Summary

Whatever approach you decide to take, Id recommend at least reading up on the growth of economies outside our borders and how you can invest in them. As I mentioned in the beginning, the long term trend is that international companies are growing to compose more and more of the investment options available to you and all the other investors in the world. In order to diversify your portfolio and benefit from global growth consider taking a look at your international investment options.

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