International Diversification: A 2-for-1 deal
Today's Financial News - Posted April 7, 2009
There has never been a more appropriate time to maintain a properly diversified portfolio. The only way to do it is look outside America’s borders.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): With the equities markets now selling at a 40% discount to their recent highs, many investors are finally looking for safety. It is a move that should have been made a long time ago, but it never hurts to review the subject.
When most folks think of investing safety, they immediately turn to assets like gold, Treasury bonds and the horrific interest rates of CDs and money market accounts. Sure, all of these investments are good bets when times get rough, but unless you are weeks away from retirement, you likely cannot afford their paltry payouts.
The first step towards creating investing safety is a properly diversified portfolio. We all know that. It is Investing101 kind of stuff.
Unfortunately, too many investors believe diversification stops at America’s border. But really, crossing those borders is just the first step in weaving a strong safety net.
The goal of a properly diversified portfolio is to have a basket (between 30 and 40) of low-correlation stocks. When one asset drops, we want another to be rising by an equal amount. A perfectly planned portfolio will have a correlation coefficient of –1.0.
That is a tough figure to achieve and is impossible if you refuse to invest internationally.
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The past few months should have been an eye-opening period for investors. Systemic risk was at record high levels here in the States, meaning a stock was at risk of plunging in value, not because of its fundamental worth, but because the entire “system” was failing.
On days when the S&P 500 is down by 6% or 8%, it is nearly impossible to find any sort of diversification, at least domestically. Everything is down. International investors have a different vantage point.
You see, as soon as you invest overseas, not only are you putting your money into a company with a different market and set of its own systemic risks, you are also investing its country’s currency. It is a two-for-one deal.
Granted, stocks across the globe have been battered no matter what the country, but the currencies that bind them are a different story. Over the last couple of weeks, the dollar has strengthened significantly over the Yen and has weakened against the Euro.
For well-balanced portfolios, the action has helped created a profit center even while the equities market shivers violently.
Maintaining the perfect portfolio is difficult and takes a lot of time and skill. No matter what, success cannot be achieved unless investors erase their xenophobic ways and invest internationally.
After the G20’s recent discussions, the theme is more important than ever. You do not want to be on the losing end of the bet when that group of leaders decides to take action. It is going to get messy.
Next Article: The REAL reason for General Motors (GM) stock drop today
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