Political turmoil in the Middle East and Africa, a natural and nuclear disaster in Japan, rekindling European debt crises: It’s easy to understand why investors may shy away from investing in foreign stocks these days.
They may be making a mistake.
Reluctant Global Investors
“There’s so much fear out there,” says Darleen Gilmore, founder of Austin Wealth Specialists, an investment advisor who likes clients to put a certain percent of their holdings into global markets. “I have to ease them into it.”
In a recent survey of global investors, Franklin Templeton found that U.S. investors buy the idea that good opportunities exist outside of the 50 states, but many don’t act on that belief. According to the firm’s writeup of the survey:
“When considering equities in particular, nearly three-quarters (73 percent) of U.S. respondents stated that the best opportunities will lie not only in the U.S. over the next 10 years. However, the survey showed that just 40 percent of Americans currently have investments outside the U.S.”
Why the disconnect?
Gilmore says that people who lost money in the markets in 2008 and 2009 or who have suffered from a period of unemployment, are hesitant to jump into investing outside of home terrain.
Building an International Portfolio Heavy on Emerging Markets and Agriculture To Beat Inflation
She works mainly with customers preparing for retirement or who have already retired, and though she doesn’t put a huge chunk of their money into emerging markets, she does like to see a slice of 10% or so in global funds. With faster economic growth coming outside the U.S., Gilmore sees this as one way to help clients beat inflation.
When building international exposure into her clients’ portfolios, Gilmore focuses on a few trends:
- Her focus is on emerging markets rather than developed markets outside the U.S.. First, US indexes like the S& P500 have companies with strong exposure to developed markets outside the U.S. already (Coca Cola (KO), McDonalds (MCD), etc.). Second, Europe is struggling with a growing list of sovereign debt crises, rising unemployment, and aging populations. Third, emerging markets are where the fast growth is likely to come from.
- She also puts a focus on agriculture, including meat. This is Gilmore’s bet on the rising middle class of India, China and other emerging nations, and their growing taste for a broader diet with far more protein.
- For balance, Gilmore includes some shorter-term fixed income investments. Those should help balance out performance, so her customers don’t get too nervous if things swing down for a while in the rest of the portfolio. “The reason people won’t hold an investment for some time is the volatility,” she explains. “If I can get them focused on the whole portfolio, then I can get them to be a little more patient.”
Gilmore is not a market timer, but she does advocate using a tactical asset allocation in which an investor makes some shifts from time to time based on the broader environment. She is not a fan of buy and hold, which she says most clients can’t really embrace. They become anxious to do something from time to time, and she sees opportunities to do so. “Investments change, portfolio managers change, new opportunities come about,” she notes. One example: Exchange Traded Funds (ETFs) and UCIs (which stands for “Undertakings for Collective Investment”), which she uses for most clients today. Their transparency, lower cost than mutual funds and the ability to trade and price them at any time, leave clients feeling more secure, she says.
Though it can take time for a client to become comfortable with global investing, Gilmore argues that without it, investors don’t stand a great chance of keeping up with inflation. For any investor near retirement, doing so is critical.