Global Markets Investing
The Smart Profits Report: Issue #411
Wednesday, April 11, 2007
Global Markets Investing: Get 300% More Bang For Your Investment Dollar And Diversify Your Portfolio
By D. R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research
It’s a fact that money flows to where it’s treated best. That means most investors tend to invest their money close to home, or in the “best known” places. And for most folks reading this article today, that means investing in the U.S. markets. But it also means you might be missing out on the best returns.
Over the past few years, many economists and authors have talked about “globalization” (or the global economy). But most investors still limit their investments to vehicles in the U.S. or ones that are highly correlated to the U.S. market, rather than looking towards global markets investing. And as we shall see below, that’s a huge mistake.
Let’s take a look at the performance of the U.S. market versus other regions of the world - and how you can diversify your portfolio with a simple click of a mouse.
Global Markets Investing: Strength On A Global Scale
The past nine months or so has proven to be a strong period for the markets. Yes, we saw a sharp pullback that hit all the global markets at the end of February - but it came after a remarkable rally, and the decline was relatively brief.
So while many investors panicked, it’s worth remembering that stocks are still in positive territory since late June/early July 2006.
However, as the chart below shows, it’s been more positive for some than for others - with the U.S. not the best place to invest your money.
The chart shows the relative performance on a percentage of price basis for the S&P 500 (red line), Asia-Pacific, excluding Japan (the dark blue line), Latin America (green line) and Europe and Asia, excluding Japan (the pink line).
As you can see, the worldwide equity markets have performed strongly since they made lows last July. And it doesn’t take a rocket scientist to see that while the U.S. market has given investors some nice returns, it’s lagged the world’s strongest regions by a considerable margin.
But what if you missed the bulk of the market rally over the second half of 2006? As the chart below shows, you could have still scooped some gains this calendar year. But again, you can see that the other three regions outside the U.S. have performed much stronger.
“Globalize” Your Portfolio And Take Advantage Of The World’s Financial Muscle
There are many viable investment choices outside the U.S., which can help boost your overall returns. Here are a few suggestions on how you can take advantage of strength in other parts of the world:
- Exchange-Traded Funds (ETFs): Simply put, ETFs track the performance of a class of assets. This can be anything from regional stock markets… an individual country’s index… commodities… or stock sectors. The global charts above are from the following regional ETFs: iShares MSCI Asia-Pacific ex-Japan (AMEX: EPP), iShares S&P Latin America 40 Index (AMEX: ILF) and iShares MSCI EAFE Index (AMEX: EFA), which tracks Europe and Asia, excluding Japan.
If you want your investments to track a specific country’s market, however, you could opt for ETFs like the iShares MSCI Japan Index (AMEX: EWJ) or the iShares MSCI Australia Index (AMEX: EWA) among many others. The beauty of ETFs is that they incorporate the best characteristics of both mutual funds (in that they’re highly customizable) and of stocks (they trade just like stocks on the exchanges and have very low transactions charges when compared to mutual funds).
- Beware Global Volatility: It’s important to note, however, that while regional investing can bring you great returns, some markets also carries extra risk. For example, the Latin America ETF is much more volatile than a U.S. index fund, and you must consider this volatility when determining what size position you want to take (remember… the higher the volatility, the fewer shares you can safely trade).
- Dodge The Domino Effect: The global economy is a reality. So bear in mind that other regions are inextricably linked to other markets around the world. For example, widespread selloffs - like the one we saw on February 27, 2007 - will likely affect all markets, albeit in varying degrees. Therefore, make sure your portfolio isn’t overly exposed to one particular investment area.
With several international markets outperforming those in the U.S., it’s not surprising that investors pumped almost $50 billion into foreign large-cap funds in 2006 alone. So if you’re looking to get more bang for your buck, you’d be wise to diversify your portfolio holdings to take advantage of this foreign strength.
Great trading,
D. R. Barton, Jr.
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Today’s Smart Profits Cribsheet
- Foreign large-cap funds have chalked up 19% to 21% annualized returns over the past three years, compared with 9% to 13% annualized gains for U.S. large-cap funds, according to Morningstar. Emerging market funds, which focus on investments in countries like China and India, racked up an impressive 28% annualized gain over the same period.
- Management consultants AT Kearney recently ranked China and India as the top two places in the world to invest. It marked the first time in history that the U.S. dropped to third place. To find out more about how you can take advantage of these explosive emerging global markets, please visit this link.
Related Articles:
- What’s Happening in the Global Markets: The Global “Ripple’s” Headed Our Way
- Exchange Traded Fund Investments: Four Key Advantages Of Exchange-Traded Funds
- The VIX and VXO: How You Could Have Predicted The Market’s Recent Meltdown
The Chart Of The Week
In March, we mentioned in this space that the Utilities Select Sector SPDR (AMEX: XLU) - the ETF representing the utilities sector - continued to rise while the broader market endured choppiness. As long as this remains the case and the market is undecided on direction, this traditional safe haven will continue to do well. Sphere: Related Content
