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MAKING CENTS OUT OF THE NEWS
Blog #45
(November 25th, 2009)
IS THE TRIED STILL TRUE?
By Tom McAllister, CFP®
The world is beginning its recovery from a terrible economic scare. It's time, I think, to examine whether the "tried" is still "true", and whether the concept of diversifying into investments outside the United States makes as much sense as it once did. For many years, in my lectures and writings, I've been preaching about global diversification in order to lower risk and enhance returns. To what extent, I asked myself, does this concept still apply in today's world?
Having arrived at a resounding "Yes!" answer to my own question, I plan to use today's blog to share with readers what factors I reviewed and the reasons behind my conclusion.
· 75% of all publicly head companies are overseas.
· 60% of all stock market capital is overseas.
· 55% of publicly traded bonds are overseas.
· 85% of global expansion in the next ten years is expected to occur outside
the United States, particularly in Asia.
· Nearly half the revenue of Standard & Poor's Composite Index companies
comes from outside their home market.
The growing bond between China and the United States is being addressed in person by President Obama in person as this blog is being written. We need China to provide cheap consumer goods for our citizens. We need China to purchase our government debt (that country now holds $800 billion of U.S. debt). China, in turn, needs access to our markets our capital, and our more advanced technology.
To greater or lesser degrees, we have similar bonds with other countries, beginning with Canada and Mexico here in North America.
The most important trend in the global economy, in my opinion, is the growing role of developing countries, most notably China, India, and Brazil, in which the speed and scope of the changes in these countries has significantly impacted the way the world does business. I am still leery of the fourth member of the BRIC bloc, Russia, and see it as attractive only for its huge energy resources. Still, I recommend avoiding investing there out of fears concerning irregularities in enforcing securities and business law in the country.
Overseas markets are growing rapidly; U.S. companies that can master the art of global competition have the potential for great success in the coming decade. Most stock portfolios that I've reviewed contain at least 20% in U.S.-domiciled multinational corporations that derive a majority of their profits abroad. I have been recommending the addition of 20% foreign stocks, bringing those portfolios to a total of 40% overseas diversification. I have now revised this number to 50%. Investors may achieve this higher number through a combination of multi-nationals or purely foreign stock.
When it comes to portfolio diversification into overseas investments, the tried is still true - only more so!
Special bulletin for Indiana residents only:
Reminder #1:
529 College Fund contributions must be made by 12/31/09 in order to qualify for your 2009 Indiana state tax credit.
Reminder #2:
12/31/09 is the last day rollovers will count towards the state tax credit. If you are considering a change, now is the time!
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