As most of you are probably aware, I am a big fan of investing overseas and I have been doing so through Landau Securities for a number of years. This article written by Jeffery shares some of the same thoughts that I do, so I felt that I would share it with you.
The returns on international mutual funds have far out-paced those earned by U.S. funds for the last several years. As a result, there has been a deluge of money flooding into these funds. Is this the 1999 Tech Bubble all over again? Read on to find out.
Investing in technology stocks was the big thing in the late 90’s. Internet startups that didn’t have a dollar in sales were raising billions of dollars in an IPO. The value placed on companies was outrageous. Anyone remember Priceline.com? In 1999 the stock hit a high of over $300. A few years later it was trading at $5 a share. Will the same thing happen with International stocks?
The short answer is no. Investments in foreign companies haven’t reached the frenzied pace seen in the Tech Bubble. Moreover, there is a reason overseas markets are performing so well. It’s essential you understand the underlying trend so you can properly allocate the place international investments have in your portfolio.
My wife and I recently returned from a short trip to Cambodia. My experience there has given me a greater appreciation for and an understanding of the development under way in Asia.
Cambodia is a very poor country. The average annual income per person is $2,000. And they’re still recovering from atrocities of the Khmer Rouge in the late 1970’s, when 2 million people died. Now, 40% of the population is under the age of 15.
The human spirit, though, is the same everywhere. Ambition and desire are not American attributes; they are basic to human nature. And that’s what I saw in Cambodia. Many are working to improve their own lives and those of their families. That means commerce.
Cambodian wages are very low so foreign money is flooding into the country. Garment factories are being built and employ thousands. That’s causing land prices to double and triple in value. Family rice patties are now sold for tens of thousands of dollars. Their sale completely changes the lives of that family.
Invariably, they buy a car and home. They buy furnishings. That money trickles through the economy, raising the standard of living each step of the way. Multiply that by thousands and thousands and you can see the impact it has.
The capital of Cambodia is Phnom Penh. Just 5 years ago many of the streets there weren’t even paved. Now they are. New roads are being built and hydro-electric dams are being planned.
Cambodia is just one example of what is happening in countries all across Asia. In China and India alone there are over 2 billion people. Most of them have lived in poverty all of their lives. But that is changing. Standards of living are increasing.
Will this rate of growth continue forever? No. But I believe it will last a decade or more. The rate of growth isn’t going to be constant. There will be cycles just like there are in any economy. There’s no denying the overall trend, though.
What does this mean for your portfolio? I believe that many investors should have a substantial part of their portfolio invested outside the United States. Our economy has been growing around 3% a year. China and India’s economies are growing around 10% a year.
Traditionally, experts have suggested that 10-15% of your portfolio be invested internationally. Now some suggest 25%. I believe it should be higher than that.
The problem, though, is that you can’t just throw money into an overseas mutual fund and forget about it. These markets can be very volatile. China’s market dropped almost 10% in a single day earlier this year. It’s vital that this money be invested wisely, that it be closely monitored and that strategies are in place to reduce the overall risk.
That’s what I’ve been doing in my clients’ accounts the last year or so. Some of the stocks that have performed very well are Bayer (BAY), Siemens (SI) and Bunge (BG). There are investments in Canada, Europe, Russia, Israel, Brazil, Australia and all across Asia.
Using targeted companies to profit from such trends is better than just buying an index. When balanced with other income-oriented investments and loss-limiting proprietary strategies, the result is a portfolio that is designed to have greater growth potential than one focused only in the United States.
It’s important that you have money invested outside the United States. The growth in emerging markets like China and India isn’t a fad, but a trend that could last for decades.