Friday, December 01, 2006

Shop Global, Think Global, Invest Global

From today's WSJ, an article titled "Dollar's Decline Boosts Overseas Returns: Money Pours Into Mutual Funds That Focus on Non-U.S. Stocks:" "Mutual-fund investors in the U.S. shipping their money overseas continue to have the wind at their backs. They are getting a lift from declines in the value of the dollar against other currencies that in some parts of the world have more than doubled the returns on their stock- and bond-fund investments."

As the table above shows, YTD stock returns throughout Europe have been about double the US stock market return of about 12%, and have been boosted by the double-digit appreciation of the euro and pound during the year. YTD Dollar returns in China, India and Spain are 3-4 X times higher than the U.S. return.

An often overlooked and neglected advantage of globalization are the significant benefits from global investing. According to the graph above, a $10,000 investment over the last three years would have generated about an additional $4,500 for a US investor from investing overseas ($17,000) vs. investing in the U.S. ($12,500). Globalization not only give U.S. consumers access to the world's cheapest and best goods and services, but it also gives US investors access to the highest stock returns. Disucssions about the "benefits of trade" often overlook the benefits of international investments.

Dollar returns in Spain and India this year are more than 3.5X higher than the 12% in the U.S., and the 55.55% return in China is more than 4X the U.S. return. We hear a lot about losing U.S. jobs to India and China due to globalization and outsourcing, but we don't hear much about the significant benefits to U.S. investors from "outsourcing" investments to China and India and getting returns 3-4X higher than the U.S.

Think about it: We get goods from China at lower prices than domestic prices, we get services in India at lower wages than domestic wages, and we get stock returns in those countries 4X higher than in the U.S.? What more could we ask for?

And I can hear protests already that only "the rich" can benefit from 40-50% stock returns overseas, but that is not true. According to my analysis at
Morningstar, using its fundscreener, there are almost 200 no-load international stocks mutual funds that have minimum purchases of only $500! A $500 investment overseas three years ago would now be worth about $850!

My advice: Shop globally, invest globally, travel globally, eat globally, think globally.



At 12/01/2006 10:45 AM, Anonymous Anonymous said...

Professor, thanks for the information. You might want to warn people about the risks, though. Too many people just see dollar signs and invest their money as if they were playing the lottery.

Although I am not a professional financial advisor, I probably spend too much time researching my 401(k) investment. Consequently, I believe that foreign investment belongs as a part of a well-diversified portfolio; it is part of mine.

However, some of the funds are volatile. Beta ratings significantly higher than 1 and R2 of much over .50 usually mean that the funds react to the market more than other funds. That is good when the market is going up, but bad when the market is going down and markets are always cyclical.

Everyone has their own risk factor and has to do their own homework. Long-term and short-term investing strategies and returns are different. Sometimes a steady 12% return beats a volatile 50% return. Trying to chase the best and latest high-percentage returns with all of your money is actually high-stakes gambling. Do not bet what you cannot lose; diversification, in my opinion, is probably the best key to safely protecting your investments.


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