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Staying the Course in
Overseas Investing
Following a pattern set by Wall Street, financial markets around the globe suffered a prolonged bear market from 2000 to 2003. Pitching financial seas have
led some investors to turn their sails toward domestic waters, while many others
have seriously questioned the role of international investments in their
portfolios.
Though it's natural to feel some trepidation during uncertain times, savvy
investors recognize the long-term benefits of overseas investing.
Global Diversification
International markets have historically been more volatile than
their domestic counterparts. Yet adding foreign investments to a portfolio can
help strengthen its position against market fluctuations. That's because
political and economic issues that affect the United States may have a much
smaller impact overseas.
For example, in early 2003, Wall Street struggled to overcome issues ranging
from economic uncertainty to the war in Iraq. Although some foreign markets were
also affected by these events, the MSCI EAFE Equity Index, which is generally
considered representative of international markets, gained 39.2% in 2003, while
the S&P 500 gained 28.7%.¹
The accompanying graph shows how a hypothetical portfolio can be influenced by
international diversification. Of course, there are risks associated with
investing on a worldwide basis, including differences in financial reporting,
currency exchange risk, as well as economic and political risk unique to the
specific country.
Potential for Bargains
Because of their reputation for volatility, international stocks are often
traded at discount prices. From a price-to-earnings standpoint, emerging markets
trade at about 13 times forward earnings, compared with 19 times in Europe and
21 times in the United States.²
International markets may also offer a higher potential for growth than domestic
investments. Particularly for developing nations, newly implemented processes
and technologies borrowed from other countries can pave the way for quick
advances in efficiency and productivity.
With the dollar's decline, international markets have become even more appealing
to U.S. investors. That's because gains made in foreign currencies are worth
more when exchanged for dollars. In the past two years, the dollar has fallen
40% against the euro and 13% against a larger basket of world currencies.³
Overseas investing can play a role in almost any portfolio. Learning how to
position your portfolio's overseas exposure, however, requires careful
consideration and judgment.
1)
Wiesenberger, 2004. Performance described is for the period 12/31/2002 to
12/31/2003. U.S. stocks are represented by the S&P 500 Composite Index total
return, which is generally considered representative of the U.S. stock market.
International stocks are represented by the MSCI EAFE Equity Index, which is
generally considered representative of international markets. The performance of
an unmanaged index is not indicative of the performance of any particular
investment. Individuals cannot invest directly in an index. Past performance is
no guarantee of future results. The return and principal value of stocks
fluctuate with changes in market conditions. Shares, when sold, may be worth
more or less than their original cost.
2) The Wall Street Journal, March 20, 2003
3) Haver Analytics, 2004
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