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Invest at home or invest abroad?

Seems to be that there's negative talk everywhere (instability in Europe, asia, talks of more recession in US). What's the better option here lately? investing abroad or investing at home?

May 09, 2012 by Miguel from Yuma, AZ in  |  Flag
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15 votes

Hi Miguel, the short answer to your question: both places! Markets, economies, currencies and countries cycle in and out of favor over time, but it's very hard to predict accurately when it's "time" to invest in one place or move on to the next. So rather than try to guess which geographical area is better, a solid long-term strategy is to cover all your bases by investing at home and abroad--at the same time. Taking this long-term diversification approach has historically paid off, and I've yet to see a good reason why that won't hold true in the future. Mike

1 Comment   |  Flag   |  May 09, 2012 from Orland, IN
George Cones, JD

Well said.

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Flag |  May 09, 2012 near Wilmington, DE

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13 votes

Miguel, you ask a very good question in light of recent news headlines. If you are a long-term investor, I think Michael, John, and Paul have all make excellent points. I agree with Michael that you should invest both at home and abroad. I agree with John that the emerging international markets (Brazil, Russia, India, China, etc.) currently look more attractive than the developed international markets (Europe, Japan, etc.).

You should also consider that the US stock market currently makes up 32.65% of the world's stock market capitalization. We have by far the largest stock market as the next largest stock market belongs to Japan with only 7.24% of the world's total. However, with the US making up only one-third of the world's total stock market, it's important to recognize that there are many opportunities abroad. If you exclude international markets you are missing out on 67% of the world's total stock market opportunities.

Bottom line, I believe that you should have your core equity investments in US equities. I also think you should maintain some international exposure even in the current environment. Stock valuations (P/E's) across the globe are currently trading below their long-term historical averages. As a firm, we have underweighted our exposure to Europe, but we still invest abroad, and we favor emerging markets.

1 Comment   |  Flag   |  May 10, 2012 from Findlay, OH
Mahesh

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Flag |  Jan 28, 2013 near Wright City, OK

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9 votes

The advisors here have provided sage advice. You might be interested to see how different markets have performed over the last ten years (http://blog.northcapital.com/norcap-return-box-2001-to-2011), not because you can or should use past performance to gauge the probability of future return, but to illustrate the importance and power of diversification. If you have a portfolio that is well-diversified by asset class, investment style, and geographic region, some portion of your investments will always be performing well. Even during the financial crisis, U.S. Treasuries delivered exceptional returns.

1 Comment   |  Flag   |  May 10, 2012 from San Francisco, CA
George Cones, JD

Good information. The periodical table tells a story. This year's darling, next year's dog. It shows why many individual investors wind up chasing their tails. Develop a strategic allocation, stick to it, and rebalance to that strategic allocation.

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Flag |  May 10, 2012 near Wilmington, DE

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7 votes

Miguel -- Michael's comments above are on target. Another way of thinking about it is that diversification reduces volatility which is a good thing. See http://granitehillcapital.com/blog/investing/a-better-way-to-invest-for-retirement Hope this helps. Paul

Comment   |  Flag   |  May 09, 2012 from Ridgefield, CT

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6 votes

Miguel - I agree with Michael. I favor emerging markets over developed markets because they're showing stronger growth, better fiscal discipline and improving inflation but emerging markets equities are volatile and investors tend to sell them when they shed "risk" assets. The U.S. appears, to me, to be the most attractive large developed market right now but still has it's own share of issues. Thus, diversifying across both international and domestic markets should be beneficial. The argument is substantially the same on the fixed income side - better yields in emerging markets because of "risk" but the U.S. is the "safe haven" when investors become risk-averse, so exposure to both is practical. I'm leaving out foreign developed markets, primarily Europe, given the immediate risks the European financial crisis presents to investors.

Comment   |  Flag   |  May 09, 2012 from Clinton, NJ

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6 votes

"Sensible investors pursue diversification as a policy to reduce risk, not chase performance. By following a disciplined policy of maintaining a well-diversified set of portfolio exposures, regardless of market zigs and zags, investors establish the conditions for long-run success." -- page 60 Unconventional Success: A Fundamental Approach to Personal Investment by David Swensen. http://en.wikipedia.org/wiki/David_F._Swensen. In other words, be careful about market timing -- there are lots of well-informed institutions in the market. While the outlook for Europe may now appear dark, for every share sold there is a share purchased. The known risks should be priced into the market.

Comment   |  Flag   |  May 09, 2012 from Ridgefield, CT

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0 votes

I agree with "both". In general people are under-invested abroad. A newer benchmark that captures world investing is the All Country World Index or AWCI. Recently I have seen investment choices show up in 401k's that track the AWCI-ExUS. Here is a link to the iShares ACWI index fact sheet.

http://us.ishares.com/product_info/fund/overview/ACWI.htm

Scroll down about a page to see the country weighting breakdown. As noted in other responses, I strongly agree to be aware of your emerging vs. developed country exposure. I have noticed many 401k plans are light on emerging choices.

Comment   |  Flag   |  Sep 05, 2012 from Western Springs, IL

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