CALL IT global gloominess. In the wake of the year-2000 tech wreck, investors who hoped to find greener pastures outside the U.S. were sadly disappointed to discover world indexes heading south, too. The problem? Partly it was the dramatic fall in the technology sector, where growth had been driven by not just the U.S. but by countries around the world, even emerging markets. World markets also tend to move in sync during a global crisis, as we saw on Sept. 11, 2001. With those events, a simultaneous drop was assured. Not only did the U.S. government appear vulnerable, but the World Trade Center was also attacked -- the heart of global financial markets.
Nevertheless, you still can find diversification for your portfolio by looking abroad. Despite the example of the past three years, over the past three decades the economies of the world's different regions have tended to boom and bust in cycles that often offset each other.
A dramatic example of that sort of divergence came in 1998 during the meltdown among the Asian economies (see applet above). Japan's Nikkei index lost almost 40% between June 1997 and October 1998, as economies across the Pacific Rim imploded due to financial mismanagement and corruption. At the same time, however, European markets blossomed as the continent came closer to true economic union and a rash of U.S.-style corporate restructurings began to pay dividends. One region collapsed; another made up for it.
Our view? Don't give up on the world yet. We still believe international stocks can provide solid diversification for a portfolio heavy on U.S. equities. Indeed, with the world economy increasingly interconnected, investors can hardly afford to ignore foreign stocks. After all, approximately 50% of the world's market capitalization exists outside of the U.S., up from 25% in the 1970s.
That said, investors might have to work a little harder to achieve global diversification than they did in the past. One easy way for you to achieve this is to seek out international mutual funds that don't mimic your U.S. selections. Consider investing in small-cap and midcap overseas portfolios, as their holdings are unlikely to turn up in any U.S. diversified fund.
If you decide to buy individual stocks, just be sure that you're buying companies that don't have a significant U.S. presence or that are held in any of your mutual funds. You can buy foreign stocks either through a broker directly on foreign markets, or you can purchase what are known as American depositary receipts (ADRs) on U.S. exchanges.
Risk/Reward
International stocks have special risks, such as fluctuations in foreign exchange rates. It's also true that foreign companies are subject to different rules of accounting and usually far less government scrutiny than U.S. investors are used to.
Within the overseas category, emerging markets are the riskiest of all. Economies can collapse, as we saw with Argentina, and governments can fail. Compared to nations with more-developed economies, these countries remain riskier bets.
Of course, there can be a payoff for investors with extremely strong stomachs. In 2002, the developing markets of Korea and Russia were among the year's top performers. For example, Russia's RTS Index soared more than 34%, while the S&P 500 lost more than 22%. That said, if you're not a big fan of loop-to-loop rollercoaster rides, try a diversified foreign-stock fund with some exposure to emerging markets instead.
|
|
Global markets have moved closer together in recent years, but don't rule out the balancing effect of international stocks yet. Over the long run, they've provided solid diversification for portfolios heavy on U.S. equities.
|
|
