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Where to Invest for the Long-Term

In this week's article, I wanted to re-visit a theme I wrote about last year. That theme was the importance of US investors allocating a portion of their overall portfolio into international stocks.

Many of these international markets have been beat up in the last year even more than the US market. Much of the financial turmoil in overseas markets has been caused by their banks unknowingly buying a lot of the toxic assets that Wall Street was selling.

Another reason for the dramatic selloff in overseas markets has been Wall Street investors selling everything they owned overseas to bring the money home to the "safety" of the US.

To illustrate my thoughts on this Wall Street strategy, here is an analogy - a nuclear blast has gone off on Wall Street. Instead of getting as far away as possible from ground zero, Wall Street money managers have been running full speed toward the blast!

The Long-Term Case

Here are some reasons why investing for the long-term in international stocks is still a good idea.

There are many kinds of investment risk, including the risk of being left behind. Long-term, most of the economic growth that the world will see over the next few decades will occur outside the borders of the US.

Here is some data from the World Bank:
1) Today, the US and Asia each account for 28% of the worldwide economy. That is a total of 56% combined.
2) Twenty-five years from now, the World Bank estimates that America's share of the global economic pie will have slipped to 24%. However, Asia's share of the global economic pie will have soared to 55%!

In short, in a bit more than two decades, Asia will be twice the economic powerhouse that the United States is today. Yet, anyone watching CNBC and other financial media outlets would think just the opposite.

Most individual investors know famed Wharton Business School Professor Jeremy Siegel for his best-selling book - "Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies", which he updated in November 2007.

Professor Siegel recently pronounced that the long-held conventional wisdom on international investing should be thrown out the window. The conventional Wall Street wisdom is that an investor should hold no more than 5% - 15% in international stocks.

According to Professor Siegel, the real risk that US investors face is getting left behind financially because of too little of a portfolio being allocated to the fast-growing overseas markets. Professor Siegel goes on to say that financial advisors who stick with the old asset-allocation model (and most financial advisors still do) are doing their clients a huge disservice.

Siegel now believes that international investments should comprise about 40% of your total holdings. These holdings can include either international mutual funds or ETFs or individual international stocks.

I would also add into that category stocks that do a great deal of their business overseas such as McDonald's, Coke, Monsanto, etc.

As always, feel free to contact me with any comments or questions you may have.

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