Photo Credit to Amanita
The problem arises for many retirees that domestic slowdowns put their own retirement jeopardy. It has long been the advice that future retirees should invest more of their own money in domestic stock funds rather than chase the foreign markets of the world. But is this advice really sound? Or are investors missing out on some of the best growth periods by avoiding overseas investments?
The common adage is that retirement portfolios should invest no more than 20% in foreign stock funds. But in the days of globalization, this seems far from a reasonable diversification. The idea that investors should put just 20% of their future retirement fund in the fastest growing markets of the world seems a bit far-fetched. While some foreign stock funds may be too volatile for some to handle, professional management and a consideration for risk keeps the chance of losing equity in check, while providing hefty gains.
Look overseas for smaller companies
Investors in developed countries should look further overseas for new investment choices rather than following the same blue chip stocks around the investment pool. Large stocks are very much prone to the impact of market sentiment and move with the market, rather than with their own developments in business. Wal-Mart, for example, rarely sees any large upswing or downswing in the number of customers or profit margin and is left to wade in the results of the entire market. Why limit yourself to the returns of the overall market when a world of returns awaits?
A little too close to home
Further, the idea that 80% of your retirement fund should stay in your own area is a little conceited, even for the most confident of investors. By limiting your retirement fund to such a small area, you’re greatly increasing risk. It is likely that your source of income is dependent on domestic economic situations, as is your dwelling and the returns of 80% of your retirement portfolio. Whether you see each of these as an investment or not, there is much to lose in a serious economic downturn.
What many investors fail to realize is that true diversification involves much more than spreading out investment dollars; it also has to do with balancing sources of income and how dependant one is on each investment.
Instead, investors should favor a greater diversification that comes from better investments in foreign stock funds. While these funds have been touted for years as being too risky and more of a gamble than an investment, the overall returns of foreign stock funds have performed relatively well. Foreign stock funds produce results over the 10 year average equal to their domestic peers, but give a much better return when the US market slows.
Difference between international and emerging markets
Investors should be able to draw a noticeable line between international funds and emerging market funds. Emerging market funds do carry a distinguishable amount of extra risk, due solely to the fact that the managers are chasing the hot countries of the year, rather than plopping investment dollars in just a simple mix of international stocks. Emerging markets are obviously risky, as government decisions, liquidity problems, and a general irrationality of new markets make them less stable than developed funds.
International funds, on the other hand, look to measure out the risks and rewards by balancing investment in a plurality of international stocks in developed nations. International funds shine when domestic returns slow, but produce returns that are on par with localized investments over the long term. While the large upswings in international investments are random and often not easily predicted, these funds return better because they produce returns equal to domestic funds, with a few random growth spurts mixed into the results.
Buy in over time
Dollar cost averaging is particularly important in international funds because of the upswings and downswings. For a broad based international fund that spans many different markets, some may be producing large returns, while others show losses. Dollar cost averaging into large international funds spreads the wealth around, while ensuring that an investor is exposed to all markets, bull or bear.
The most important thing to remember is that diversification spans across all asset classes and country lines. While you may think that diversification stops with a reasonable investment in small cap, large cap, bond funds, and some index funds in a local market – foreign investment shows a truly worldwide perspective and real diversification.