Foreign Investing - US Investors Still Missing Out?

Investors are still too slowly realizing what the academics have long pointed out -- adding foreign stocks to your portfolio will, over the long term, increase your returns and lower the overall risk of your portfolio.

US investors embracing foreign investing are both realists and optimists. They are optimistic that the chances of doing well are better if they have at least some of their hard-earned money invested in countries with higher growth rates than here. They can't help but be realists when they see a new record high Trade Deficit for the US, almost monthly, as the figures are released by the Treasury. Until we get our fiscal and trade deficits under control, while short-term rallies are highly probable, no change in the long term weakness of the US dollar is likely for the foreseeable future.

The problem is that most US investors, and their advisers, have not had the time, opportunity or inclination to become educated about and familiar with foreign investing, preoccupied as they are with just getting their own home market right.

This lack of familiarity and comfort has put average investors off overseas markets. It has encouraged many investors to use relatively costly actively-managed mutual funds. These funds are often sold by brokers or advisers with additional agendas, -- such as to pay for a Financial Plan the broker has provided to the investor. Unfortunately, these actively managed funds so often also produce disappointing results. In large part this is because actively managed funds have relatively high operating expenses, but it is also because International fund managers, like their domestic colleagues, find it so difficult to sustain benchmark outperformance ?and of course private investors just love to chase historic performance!

Even many wealthy investors do not have any individual foreign holdings at all. The New York Stock Exchange conducted a Survey of US holders of foreign stocks in 2000. The Survey showed that barely one in ten of investors who held stocks directly, also held a foreign stock of any kind. In my professional experience, this foreign stock was more often than not a Canadian stock. Very few investors on average really benefit from true regional economic and currency diversification from their direct holdings.

Most investors still don't realize how easy it has become to trade and follow overseas securities.

The development of low cost Exchange Traded Funds ("ETFs") that specialize in tracking the local Indices of different geographic regions, or even individual countries, has meant that the US investor now has made ETFs a real alternative to those expensive actively-managed Mutual Funds

A convenient way for a US investor to take a direct investment in an individual foreign company exists if you use a form of security called an American Depositary Receipt, "ADR". These were first developed way back in the 1920's. ADRs are US securities, traded on US markets, and though the majority of them trade on the Pink Sheets, there are still several hundred from which to choose that trade on the New York Stock Exchange or NASDAQ, including dozens of household names like Nokia, Toyota, Sony and Shell.

The huge strides made in the last few years in Internet information access, transaction ease, trust, and convenience, all mean you can now track the fortunes of, and trade, the ADRs of an Australian bank or a Mexican bank, just about as easily as you can a US bank ?and in your regular US brokerage account at that.

There are downsides to foreign investing too. The possibilities opened up by the Internet are themselves tending to cause markets to correlate more closely with each other, reducing the usefulness of geographic investment diversification. The accounting, reporting, and stock market regulation standards of many foreign markets are frequently not as high as we take for granted here - though all these are rapidly changing for the better. And of course these foreign nations are sovereign states; with different degrees of political stability, and often with a different political outlook than would be broadly accepted here.

The time to buy overseas markets is when they are most despised and least loved. And that certainly hasn't been the case for the last year or two; when overseas markets have delivered much better returns than has the US market.

Still, investors generally ought to give a bit more thought to the routine 10 -15% of their portfolios typically recommended for foreign investments. Just avoid the latest hot International mutual fund of the Quarter ?any Quarter!

Survey cited: http://www.nyse.com/pdfs/Research_NYSE_Supplement.pdf

Duncan Ellis is an author and retired stock broker. He has worked both in the UK and USA as a broker. He specialized for many years in researching, trading, and advising US investors on foreign securities. He operates the specialist website http://www.tradeforeignstocks.com.