As economic growth speeds up outside the U.S., it may be the right time to include some foreign equities in your portfolio. Since foreign markets don't necessarily move in the same direction as U.S. markets, it helps keep your portfolio diversified.
Investing and auto racing have many similarities. Some investors prefer the drag strip and its intermittent bursts of speed. Others prefer the grueling Indy 500, where the winners are those who stay the course, picking up speed with small strategic decisions over the long haul. Whatever your strategy, it's good to add some international investments to the mix.
Overseas outpacing the U.S.
In the current economic environment, one small strategic decision to consider is increasing your exposure in foreign equities. The addition of international growth funds will bring you an added level of diversification and, possibly, stronger returns. This is because overseas markets don't necessarily move in line with the stock markets here at home. By investing overseas, you can take advantage of this strategy. The caveat is that adding in overseas exposure is safest within a conservative, buy-and-hold investment horizon.
The experts say that the U.S. makes up about 40 percent of the world's market capitalization. Sounds impressive, right? But in 1997, the U.S. accounted for 44 percent. And in 1970, the number was 67 percent. Sure, the U.S. is still an economic giant, but the pace of domestic growth has slowed down relative to other parts of the world.
What the pros say
According to an article by Paul B. Farrell in Marketwatch, investment manager Ted Aronson has voiced his support of international investing. Aronson, the head of AJO Partners that manages more than $25 billion of institutional retirement funds, puts his personal retirement money in his own AJO Funds. He does, however, have a different strategy for money that's not held in tax-advantaged retirement accounts. His taxable strategy is a low-maintenance mix of Vanguard index funds, which includes a 40 percent allocation to foreign equities. His plan has beat out the S&P 500 by seven percentage points in the past year, and about four percentage points over the past five years.
Other pros agree that adding foreign investments to your portfolio is a significant aspect of staying financially healthy.
Your decision on whether or not to go international is a personal one, based on your investment objectives. A conservative way to give it a try is through no-load, international index funds. Diversified index funds, such as those offered by Vanguard, have low management fees and therefore tend to offer stronger returns. There are also a plethera of mutual funds to choose from, including country-specific options.
As you consider options and review prospectuses, don't forget to stay diversified, whether you decide to go international or not. If you're taking the long haul Indy 500 road to savings, diversification will be the key to help you reach the finish line.