technology news: International Investing in a Small World - The Better Investor

Managing Global Investment Risks for Your Long Term Portfolio
It wasn?t all that long ago when international equities, even from developed markets like the U.K. or Germany, were an exotic addition to portfolios. Now most portfolios contain a healthy mix of non-U.S. exposures, not just from Western Europe or Japan but also from emerging markets and frontier markets still in their earliest stages of growth.

This has made international stocks more liquid and accessible. Mutual funds and exchange traded funds (ETFs) let individual investors reach almost anywhere in the world.

That?s important for your portfolio. More of the world?s wealth has shifted to these other markets, and having your portfolio aligned with the shifting distribution of global wealth can be good for long-term performance.

The World Is Shrinking

As international assets have become part of the investment mainstream, they?ve become more closely correlated with their U.S. counterparts. This trend is understandable: the world has become a smaller place in the last 20 years. The companies on stock market indexes in Germany or Singapore derive a great deal of revenue from operations and sales in the U.S. Likewise, U.S. companies on the S&P 500 earn a sizeable chunk of their profits from foreign markets.

Investors looking for more targeted international value can still look to some niche areas, such as international small caps or global REITs (Real Estate Investment Trusts). Real estate remains the ultimate local industry and can supply something closer to an international ?pure play?.

Emerging Markets: Risk Still Matters

While emerging market equities have become more mainstream, it still retains its reputation as a riskier sector. Emerging markets fell harder than developed markets during the 2008 market crash and are still capable of leaping up or down several percentage points in the course of a single trading day.

An old rule of thumb is to limit emerging market exposure to about 5% of your total portfolio. That is somewhat outdated. Your optimal exposures will depend on your risk tolerance, but for a typical portfolio with a time horizon greater than 10 years and a moderate risk tolerance, an emerging markets allocation of 10-15% is reasonable.

Geographic diversification still matters, despite the fact that global industry is more tied than ever. ? International equities can help you build a portfolio that reflects the changing shape and locations of global wealth.

How strong of an international position should you take? The answer should evolve over time as the world economy changes. Allocation models that worked 25 years ago don?t work now. Today?s models are probably ill-equipped for whatever realities await 25 years down the road.