A recent article and a meeting with an American Funds’ representative has me thinking about what many people might be missing from their portfolios.
According to the article in the New York Times entitled ‘As Berkshire Improves, Buffett Sings Praises of U.S.,’ in Buffett’s annual report to Berkshire Hathaway shareholders, he took a patriotic tone. ‘Money will always flow toward opportunity, and there is an abundance of that in America,’ he said.
In the mutual fund meeting, the representative stressed that ‘opportunities abound around the globe.’
Which one is right and where should you put your money?
Historically, people typically invest in their own country’s stocks to the exclusion of other opportunities. The only exception has been foreigners’ investments in the U.S. stock market. The reason the U.S. market was and is so popular is our country’s stability, the regulation and organization of our stock markets and the strength of our economy and GDP. Even today, the U.S. remains the world’s largest single economy with more than 40 percent of the world’s investors. The unrest in Egypt and Libya make people nervous, adding risk to developing markets’ investments.
Even so, people are looking around the world for investment opportunities. Even investing in large American companies can be investing globally. Buick now sells more cars in China than in the U.S., and McDonald’s plans to double the number of stores in China by 2013.
The reality now is that the world is changing and all countries are intertwined. The debt issues in Greece and Spain caused concern around the globe. Our economic upheaval at the end of 2008 hit markets around the world. An investment portfolio can be built to optimize exposure to growth and or income opportunities from around the world. For instance, the average dividend yields on U.S. stocks are lower than the yields from around the world.
Adding a layer of foreign investment through stocks and bonds leads to a new layer of risk factors. One added risk is currency risk. What if the country’s currency rises or falls against our dollar? Many funds hedge against currency risk to eliminate this from fully affecting the outcome of the investments.
Political risk—a change in law or government regulation, which also exists in the U.S.—can also affect the attractiveness of a particular investment. For example, the municipal bond permits municipalities to provide federal tax-free interest and state tax-free interest to in-state residents. This law was put into effect to lower the cost of borrowing for municipals. However, the advantage they provide to higher-income earning individuals leaves them open to a change because typically tax advantages are limited to lower-income individuals and couples.
Along with commodity-rich developed countries like Australia and Canada, developing countries have many factors that make them attractive to investors. The developing world, led by China and India, currently has 84 percent of the world’s population and 7.1 percent GDP growth, in contrast to developed countries, which have 16 percent of the population and 2.7 percent of the GDP growth. As middle-class citizens become more of a factor in these emerging countries, the demands on resources and growth of industry will be astronomical.
Due to the interdependence of the global economy and the growth of foreign economies, reviewing the exposure in your bond and stock portfolios to other developed countries and the developing countries is critical to maximizing the growth and income for your future. Diversification is not just about the mix of stocks (equities) and bonds (debt) anymore. It is about being open to the diversity and opportunities everywhere.
