Foreign investing, like foreign travel, can be difficult, complicated and expensive–with a payoff that may make it all worth the trouble.
And like foreign travel, it offers many destinations and many ways to get to them. Thrifty investors can put their money in mutual funds that mirror the indexes of foreign markets, while those who prefer to go first-class can hire expensive money managers to pilot them abroad.
Your approach will depend largely on your tolerance for risk, and on the time and effort you want to put into building and maintaining a portfolio. The most basic decision is what the pros call asset allocation: how much money should be in each kind of investment. The amount you are willing to put to work abroad will depend on whether you will be reallocating existing investments to your foreign portfolio or using “new” money, say from a maturing certificate of deposit or a lucky lottery ticket. As a rule, don’t put any more money abroad than allows you to sleep well at night.
Once you have settled on how much, don’t hurry abroad if you are reallocating existing assets. Selling a bundle of domestic stocks that you would otherwise hold just to get 30 or 40 percent of your portfolio overseas doesn’t make sense. Better to set up a systematic plan that gets you to your goal over three or four years. That way you can make the best use of “dollar-cost averaging”–investing a specified amount at specified periods, say $1,000 a month, to buy more of an asset when the price is lower and less of it when the price is high.
At the same time, you should be slowly selling those domestic assets that have appreciated the most or the occasional mistakes that you are now convinced will never rise.
Don’t be so patient if you have got a lump sum of $5,000 or so in cash sitting around. Studies have shown that putting a single large amount of money to work in the U.S. stock market, even at its peaks, usually provides better returns than dribbling it in over a prolonged period, especially when it would otherwise sit in a low-yielding bank account.
Foreign portfolios should behave in the same way. And since there is no such thing as a safe foreign bond–currency fluctuations and creditworthiness add risk–make your foreign portfolio a stock portfolio. Keep your safe money safe at home.
The next step is figuring how to apportion your money overseas. What proportions are proper? Here, too, the answer lies in the “sleep well” test. For someone who comes unglued when any investment falls more than 25 percent, only a token portion–say 10 to 15 percent–of a foreign-stock program should be in emerging markets, assuming that only about 10 percent of this risk-averse investor’s total portfolio is abroad.
An aggressive investor may have as much as 50 percent of an international portfolio invested in emerging markets. And since foreign stocks may represent 50 percent or more of the total portfolio, that means 25 percent of the entire portfolio is invested in emerging markets. That will produce a healthy kick in good years, but might wipe out more modest gains elsewhere in the portfolio in a bad year.
For most people, the best way to get into foreign stocks, whether in emerging markets or established markets such as Japan and Western Europe, is through mutual funds. Funds offer one-stop, one-decision shopping with instant diversification and minimal maintenance.
Don’t even think about trying to use individual foreign stocks to achieve the kind of international diversification you should have with anything less than $100,000. Once you have a basic international portfolio through one or more mutual funds, it can be fun as well as profitable to buy shares in some foreign companies, especially those listed for trading in the U.S. as American depositary receipts.
The following are some hypothetical portfolios, designed to demonstrate the range of possibilities available to any investor who wants to gain some international exposure, and are offered purely for illustrative purposes.
– A low-maintenance, low-cost portfolio. Novice overseas investors can start with a portfolio that would be suitable for people whose everyday lives–job, children, hobbies–leave little time to set up and run an investment portfolio. It is built on index funds that require minimal management time and effort by a fund manager and carry very low transaction and management fees. These funds will seldom win the highest marks in their category, but they generally won’t be among the lowest-rated, either.
Say you have $100,000 in the stock portion of your overall investment portfolio, all of it in a fund that mirrors the Standard & Poor’s 500-stock index. To diversify, you can shift some of your money into two mutual funds–one for Europe, one for Asia–that invest in established markets tracked by a popular international index, say the Morgan Stanley Europe Australasia Far East Index.
– Low maintenance, bigger kick. Suppose you want to be more aggressive with your original $100,000 portfolio. You might move some of your U.S. stock money into small U.S. stocks, which promise faster growth than the large-capitalization issues in the S&P 500; a fund that tracks the Russell 2000 small-cap index is one option. You can also move some of your overseas money from the big EAFE Index countries and into emerging markets, where the growth potential is greater.
– Adding expertise. Once you have established a basic international portfolio, you can begin to play to your personal strengths. Say you work for a big chemical company with a major subsidiary in Germany. If you spend a good deal of time in Germany, you probably have developed a sense not only of your German competitors but also of the ups and downs of the German economy. If you have a strong hunch that the German economy is about to rebound and you want to play that bet in the German market, simply take out equal percentage amounts from each segment of your portfolio and invest the total in a closed-end country fund. In our $100,000 hypothetical portfolio, that might mean cutting back all of the other pieces by 10 percent each to raise $10,000.
Of course, not everyone will be satisfied just to match some indexes. Some are confirmed “value” investors, unwilling to pay a high premium to obtain fast growth. “Growth” investors, on the other hand, want to ride a rocket ship and are only concerned with how fast it can go up. There are funds out there that adhere to such concepts, but it takes some looking to find them.
