Undoing Parochial Investing: Add a dash of international piquancy to your portfolio
It wouldn’t be a stretch to say that most of the planet went gaga over World Cup soccer, which brought together 32 of the globe’s best teams to compete in a thrilling blur of sweat-soaked matches. The Brazilian government temporarily changed the country’s banking hours so people could watch the games and still deposit their paychecks. In Mexico, tens of thousands of fans jammed city squares to watch the games on jumbo televisions. In Bangladesh, students at one university threatened to riot if the administration didn’t delay final exams until the World Cup ended—and the Bangladeshi team wasn’t even in the tournament.
But in the United States, the month-long athletic drama was as stimulating as two Dramamine tablets and a glass of water. Perhaps Americans have dismissed soccer because we aren’t good at the sport. After all, in many other countries, children know how to dribble the ball at an age when our kids are developing a taste for Happy Meals. Or maybe it’s because we only like to play homegrown sports. Why should we learn to appreciate soccer’s finesse moves when we can watch 400-pound linebackers crack each other’s skulls and then critique the beer commercials?
This sort of parochialism might explain why many Americans are just as reluctant to invest overseas. Why venture abroad when we can invest in Microsoft, Coca-Cola, Nike and countless other homegrown success stories? But clinging to this sort of myopia can ultimately hurt your financial bottom line.
There are two excellent reasons why you should add a dash of international piquancy to your portfolio. By doing so, you can potentially enhance your returns while at the same time reducing the sort of harrowing market volatility that too often triggers investor stampedes into the safety of CDs. If you stick with a buy-America investing approach, you’re betting all of your chips on one roulette number. And often you won’t fare as well as you might expect.
To illustrate, here’s an example from the Schwab Center for Investment Research. From 1970 to 2005, the U.S. market failed to rank as the top-performing developed market for even one year. This shouldn’t be surprising, because 49 other countries have stock markets. More than 37,000 companies are listed globally, compared with about 5,000 corporations listed on U.S. exchanges. Many of the world’s alpha dogs are also living elsewhere. The world’s largest communications corporation is Nippon T&T in Japan, and in the financial sector, Allianz of Germany is the top banana. In the utility universe, none of the top seven players is located here.
“By investing only in the U.S., you are leaving out essentially half of the world’s market value,” observes Michael Iachini, a senior research analyst at the Schwab center.
Investing overseas can also help temper your portfolio’s mercurial tendencies. What’s happened in recent times provides a decent example. During the past three years, the Standard & Poor’s 500 Index, which is the benchmark for the nation’s blue-chip corporations, has returned 10.12 percent. In contrast, international funds have enjoyed annual returns of 21.6 percent, according to Lipper, a Reuters company. Meanwhile, emerging market funds have clobbered everything else by generating returns of 30.3 percent since June 2003.
During other periods, domestic investments will make the honor roll while stocks in far-off places will lag behind. Schwab research, which is backed up by many similar studies, suggests that a portfolio that contains 75 percent domestic stocks and 25 percent international stocks will be significantly less volatile than one that sticks with American companies.
What you don’t want to do is overdose on emerging markets. If you’re an aggressive investor, it’s best to devote no more than 5 percent of your equity exposure to these cherry bombs. For those less adventurous, you may want to drop your exposure to 2 percent. As for blue-chip exposure, Schwab recommends in its model portfolios that investors devote 25 percent of their stock holdings to international blue chips.