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International investing – a contrarian view

Richard Loth

A few weeks ago, the Wall Street Journal reported, “U.S. investors are buying foreign stocks at a record pace, lured by international markets’ strong returns in U.S. dollar terms and encouraged by their investment advisers to diversify globally.” In a subsequent article, its weekend edition proclaimed, “Investors finally appear to be listening to what Wall Street has been preaching for years: It’s important to diversify a portfolio with foreign stocks.”I don’t think so. If you haven’t gotten on the foreign stock bandwagon, have no regrets. But, if you’re already on it, consider shortening the ride or getting off at the next stop.New perspectivesMy academic studies focused on international politics and business. My professional career encompasses over 30 years of traveling to some 50 foreign countries and living in four of those. I think of myself as an internationalist, not a xenophobe. Therefore, my dim view of international investing is based on factual data, which is being overlooked as investors rush – with a big push from some in the investment community – toward “exciting opportunities” that lie outside the United States. One of the arguments for investing abroad is that foreign and domestic markets are non-correlative. That’s a fancy way of saying that they move in different directions – when one is down, the other is up and vice versa. That kind of movement has a positive balancing effect on a portfolio. Another pro-international argument points out that more than half the world’s stocks are traded outside the United States, which, theoretically, represents an opportunity for significant portfolio diversification.These views need to be subjected to an updated reality check.Understanding globalizationIf you measure the non-correlative market effect from the 1970s up to the present, it supports the beneficial effects of international investing. But if we use 1990 as our starting point, United States and foreign market share prices have essentially moved in the same direction at the same time over the past 15 years. Michael Panzer, a recognized expert on global markets, sums up this new investing environment in his book, “The New Laws of the Stock Market Jungle,” by concluding, “… in today’s investment world, global markets are inextricably linked, and in performance terms, more so than they have been at any time since 1928.”The non-correlative benefit of international investing is history. You can credit the harmonizing impact of the globalization of the world’s economies for what’s happened.Pushing too farU.S. markets provide ample opportunity for portfolio diversification. There is little justification to incur the additional currency, governance, political and accounting risks associated with foreign investing, not to mention its high advisory management and expense costs. The lead article in the respected AAII Journal’s May 2004 edition concludes investors “should not expect dramatic results by adding international stocks to their retirement portfolios.” Panzer agrees those who invest overseas for diversification “may be getting less than they bargained for.”Also, stay-at-home investors in large multinational companies, as well as some large-cap mutual funds, are getting, albeit indirectly, substantial exposure to international markets. For example, prominent companies like Citigroup, Coca-Cola, Pfizer, GE and IBM generate a large percentage of their revenues from foreign operations. The same is true for some large-cap mutual funds, e.g., Fidelity’s Contrafund (FCNTX) and Capital Appreciation (FDCAX) funds have significant foreign stock components – 18 percent and 17 percent, respectively.The ‘veggie’ lessonThere are some 56 known vegetables in the world. That’s a big number to choose from, which is not unlike the situation facing investors when making stock and fund selections. I’m suggesting that you forego the investment equivalents of Chinese cabbage, Brussels sprouts, and Swiss chard and stick to home-grown varieties. Retirement plans and advisers that direct as much as 15 to 35 percent of your overall portfolio into foreign stocks are not recommending a healthy investment diet. I’d limit the foreign portion to somewhere between zero to 10 percent. The Investing Wisely column is written by Richard Loth, managing principal of Mentor Investing, an independent registered investment adviser. Loth can be reached at 827-5591 or mentorinvesting@comcast.net.


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