Guest Author - Tony Daltorio
In today's global economy, it is imperative that US investors diversify some of their assets into foreign stocks. The biggest mistake that many investors make is having too small of a percentage of their overall portfolio in overseas stocks. According to the Profit Sharing/401k Council of America, the average individual investor places less than 3% of his or her portfolio in foreign stocks. Please do NOT fall into this trap.
Here is a bit of historical perspective concerning US stocks vs foreign stocks. In the 1970s, US stocks accounted for 66% of the world's stock market capitalization(the value of all the stocks in the world). Currently that percentage is approximately 40%. A continuation of this trend means that in 25 years, US stocks would account for less than 25% of the world's total. Foreign markets are just too big for an investor to ignore.
Another extremely important reason for investors to invest in overseas stocks is simply performance. Despite the blather investors get from financial media outlets such as CNBC, the past 10 years have not been kind to US stocks. For instance, the return on the S&P 500 index in the past 10 years has been approximately zero!
In 2007, for the second year in a row, the US stock market did not even rank in the top 30 global markets. Even in comparison to other developed countries stock markets, such as Europe, the performance of the US market has been very poor. The last time the US market made it into the top 5 of the developed stock markets was in 1995. The US stock market performance versus the developing stock markets in Asia and Latin America is even more abysmal.
Another important positive factor to consider when investing in foreign stocks is the steady long-term decline of the US dollar. The US dollar's value has decline dramatically in recent years. In the past 10 years,the US dollar has decline over 25%. In fact, since the US dollar peaked at the beginning of the Bush Administration in 2001, it has declined nearly 40%!
Why is this important when it comes to investing in foreign stocks? Here is an example to illustrate the point: Let's say a person invests in some foreign stocks and in the time you held them, the stocks did absolutely nothing. But in that time frame, the US dollar declined 50%. Guess what? In dollar terms, you just doubled your money. This example shows how foreign stocks can help preserve a person's long-term purchasing power.
There are numerous ways for an individual investor to invest overseas. There are many mutual funds which invest overseas, either broadly or in a specific area (a Europe fund or Asia fund,for example). There are also numerous Exchange Traded Funds or ETFs which offer exposure to overseas markets. These ETFs are able to be bought and sold like a stock on a stock exchange. The minimum purchase on an ETF is 1 share, so an investor can buy these for much less money than a mutual fund. ETFs come in a wide range of choices - broadly based funds, area specific such as Europe, size specific such as large-cap,mid-cap,and small-cap, and even country specific such as Canada, Australia, Brazil, China, Germany, Britain, etc.
An investor can also purchase individual foreign stocks. Many trade in this country in the form of an American Depositary Receipt or ADR. Some major stocks such as Nokia trade on the stock exchange; while other major stocks such as Nestle's or Nintendo trade here in the US on the over-the-counter market and are easily purchaed through an online brokerage firm such as E-Trade. You can find information on these individual companies either through a brokerage such as E-trade or at the Bank of New York's ADR site - adrbny.com.