Why should you invest in Foreign Stocks?

Posted by David

June 14, 2008

The answer to the title question is: For better returns and diversification purposes.

Simply put, in this age of globalisation it is almost a requirement to invest in foreign countries if ones to make above average returns. It does not mean putting 5 to 10% as most Americans do. it means allocating 30-40% of ones portfolio to foreign equities. An average investor in the US has less than 10% of his portfolio invested in foreign stocks.

Of course there are many risks to investing in foreign stocks.For a brief summary go to the SEC page on International Investing.

Today foreign companies are competing and growing rapidly when compared with US companies. For example, the market capitalization of all the stocks listed in the New York Stock Exchange (NYSE) is about $27.1 Trillion as of December 31,2007. Out of this, 421 foreign companies’ capitalization is $11.4 Trillion. This shows that foreign companies are increasingly becoming more powerful and important in the global market place. On a worldwide basis the US markets constitutes only 45%of the total market capitalization of all companies. In addition to the NYSE there are many more foreign stocks listed in the Amex,Nasdaq and the OTC markets.

In addition to the above reasons, investing in foreign stocks may provide higher returns than investing in US stocks.

The following table and chart compares the Total Return of MCSI EAFE against US Indices for a period of 25 years. The MCSI EAFE Index is the all Non-US major stock markets of the world including Australasia, Europe and the Far East.

Total Return - MCSI EAFE Vs. US Index

Year	All Major Stock Markets outside US	US
1983	25%	22%
1984	8%	6%
1985	57%	33%
1986	70%	18%
1987	25%	4%
1988	29%	16%
1989	11%	31%
1990	-23%	-2%
1991	12%	31%
1992	-12%	7%
1993	33%	10%
1994	8%	2%
1995	12%	38%
1996	6%	24%
1997	2%	34%
1998	20%	31%
1999	27%	22%
2000	-14%	-13%
2001	-21%	-12%
2002	-16%	-23%
2003	39%	29%
2004	21%	11%
2005	14%	6%
2006	27%	15%
2007	12%	6%

Chart: Total Return - MCSI EAFE Vs. US Index

As we see in the above table and chart, in the past 25 calendar years foreign stocks have outperformed US stocks in 15 years.

From the above data, we can also infer the following:

1. In the past 5 years (2003 to 2007), foreign stocks have returned far higher returns than US stocks for each year. The year by year return difference is as follows:

Years 2003 and 2004 - Foreign stocks returned 10% higher than US stocks
Year 2005 - Foreign equities’ return was 8% higher than US stocks
Year 2006 - International stocks returned 12% higher then US stocks
Year 2007 - Foreign stocks returned 6% higher then US stocks

While some portion of this higher returns is due to the dollar depreciation, the majority is due to foreign companies making higher profits than our domestic ones.

2. From 1995 to 1999 during the high tech craze, the US markets outpaced international markets.

So overall foreign stocks performed better in most of the past 25 years. As US economy struggles to recover it may be the right time for US investors to take a fresh look at foreign markets and invest according to their risk appetite.

Question:

What is you portfolio allocation for foreign stocks?. Do you think you need to re-allocate your portfolio now?. Which country/region is your favorite? Post your story on portfolio allocation in the comments section.

10 Reasons to Invest in Foreign Stocks

Posted by David

January 3, 2010

Most American investors have low exposure to foreign equities in their portfolios. There are many reasons for this type of asset allocation strategy. One of them is that financial advisors recommend putting just 10% to 20% of one’s assets in foreign equities. Another reason is due to the “home country bias” inherent in all of us. Americans prefer US-based companies than foreign ones because they know those companies better, those companies advertise heavily in the media, they sponsor community social/charity programs, etc. Some consider it to be even patriotic to invest in US companies.

Some investors think that foreign markets are very risky due to political issues, lack of transparency, accounting methods, lack of publicly available information, currency risks, lack of regulations, etc. While most of these factors are true, in my opinion foreign companies are getting better and are no more riskier than US companies. One can find risky companies anywhere whether it is a bio-tech start-up based in China or a gold miner such as Bre-X in Canada or an IT firm like Satyam based in India. However there are many excellent foreign companies that are as good as any large US company that US investors can consider adding to their portfolios.

The following are Ten Reasons to Invest in Foreign Stocks:

1. Investing globally offers diversification for a portfolio. In this age of globalization diversification is not complete if one invests just in US companies. One can argue that foriegn stocks are not required in a portfolio since about half the earnings of S&P 500 companies comes from overseas revenue. But that does not mean one is diversified enough just putting their money in an index fund tracking the S&P. Overseas companies operate under different dynamics than US companies and the only way to capture their growth is investing in them. As mentioned above, financial advisors also suggest adding some foreign equities for diversification.

2. Going abroad can offer better returns to investors than staying with only US stocks.  For example, the S&P500 was up 23.5% last year. But emerging markets such as Brazil, India, Russia, China were all up 82%, 81%,79% and 111% respectively.Among the developed markets, Australia was up 30% , Sweden was up 43% and The Netherlands was up by 36%. Other Western countries such as France, UK, had similar returns like the US S&P500. America’s largest trade partner Canada was up by 30%. The US market performance in the past decade was dismal as I discussed here.

A quick review of Callan’s Chart for developed markets reveal that US stock returns have been average to less than average relative other markets. The S&P 500 was never the top ranking performer among the developed market indices in any year between 1970 to 2005.

3. Americans already own their homes in the US. Hence they must have higher exposure to foreign markets to counteract the heavy exposure to the U.S. assets. In addition, it is possible that all US-based assets such as homes, stocks and interest rate on bank deposits can all go down at the same time like it occurred since the credit crisis. So investing overseas provides diversification as well as reduces the risk of putting all eggs in the same basket.

4.The US dollar may fall further this year due to sluggish economic growth here. If ones believes in this view, then one can invest in foreign equities as the return on foreign investments will be amplified when currency exchange value is taken into account.

5.The total market capitalization of all the world’s stock exchanges is $45.4 Trillion as of Nov, 2009.  The US markets (NYSE and NASDAQ) account for just about $14.5 Trillion.(Source: World Federation of Exchanges). This shows that more capital is flowing to markets outside the US and plenty of investment opportunities exist in other countries.

6. Thousands of publicly listed companies trade outside the US. Out of the total 45,826 listed companies wordwide in November 2009, only 6,066 trade in the US exchanges. That is just 13% of all public companies available for investment.(Source: World Federation of Exchanges). So investors have a large universe of companies to choose from by looking outside the US borders. Many of the world-class companies such as Nokia (NOK), Vodafone(VOD), Toyota(TM), BASF(OTC: BASFY), Nestle(OTC: NSRGY), Unilever(UL, UN), Danone(OTC: DANOY), ABB(ABB), etc. are based in other countries.Some emerging market firms such as Tata Motor(TTM), Petrobras (PBR),Gazprom (OTC:OGZPY), etc. are also turning into global players.

7. Many foreign markets have higher dividend yields than the US S&P 500. The S&P 500 has an average yield of about 3%. In many developed markets such as Singapore, New Zealand, Australia, France, UK, Germany, etc .the dividend yields are higher than 3% with some exceeding 5%. So US investors can earn more by buying foreign stocks.

8. The current estimate for US Economic growth this year is lower than most developed and emerging markets.

9.The current US business management style is not as great as it is hyped up to be. The credit crisis is a classic example that showed that all the risk management controls in companies were ignored by those in charge or simply did not exist.This was true especially in the banking industry.Many large European companies are shareholder friendly and strive to make things better for all the stakeholders in the firm.Sure there were some European firms such as Royal Bank of Scotland(RBS) which abandoned its core principles and let down its investors. But there are many more companies that are well run and are world champions. In emerging countries, managements work harder due to lack or proper infrastructure, political corruption and myriads of other problems in order to attract capital and achieve growth by following sound management techniques. Compared to those companies, I think managers in US companies have become lazy and do not work as hard to better serve their stakeholders. One reason could be the culture that has changed so much in the past few decades leading many executives to worry only about their own earnings, stock options, golden parachutes, etc. than about anything else. Corporate boards have also become complacent in performing their fiduciary duties to the firm.

10. The population in the US is relatively small compared to the population of developing countries such as India and China. In the US, the majority of the working population is experiencing negative to flat growth in income levels compared to rising household income in many countries. Hence the demand for goods and services will go down in the US if the job and income levels do not improve. With their 401K retirement accounts down, mortgages underwater, wiped out home equity and low saving rate it is highly unlikely that that American consumer will do the heavy lifting for the US economy as in the past. This is in sharp contrast to the developing world and most of Europe where the economy is in much better shape.

Earlier:

Why should you invest in Foreign Stocks?

Why Should You Own Dividend Paying Stocks?

Believable or Not? Non-Malay applications for PSD scholarships ended in the rubbish bin during TDM's rule!

“A former Chinese minister, on retirement, openly said (in the bad old days of Dr Mahathir Mohamad’s rule) that non-Malay applications for PSD scholarships would end up in the rubbish bin,” he added.


http://www.freemalaysiatoday.com/fmt-english/news/general/7281-psd-scholarships-to-scrap-or-not-to-scrap

Make Millions From Thousands

By Selena Maranjian 
Comments (0)

I could write this article the usual way -- by showing you how to turn your thousands into millions through investments in solid, growing, well-known companies. Union Pacific (NYSE: UNP), for example, has grown by a compound average of more than 12% annually over the past 10 years, whileApple (Nasdaq: AAPL) has averaged 27% over that same period! Not too shabby.

But can such returns turn your thousands into millions? Yes, eventually. An investment of merely $10,000 would turn into $1 million in 30 years, if it grew at an annual average of 17%. But that's a fairly steep rate to count on for your stock investments -- a number to which only a select few master investors can aspire. It's safer to have more conservative expectations -- perhaps closer to 10%, the stock market's historical average annual return over most of the past century.

A fine balance 
So what should you do if you don't want to wait 50 or more years to make millions? Here's one option: Take a few chances.

With most of your money, you shouldn't take crazy risks. You might want to sock much of it away in a broad-market index fund, such as the Vanguard 500 Index (VFINX). That low-cost fund should earn you close to the market's historical return over long periods of time. You might also try S&P 500 Depositary Receipts, an exchange-traded fund also known as SPDRs. Either of these options will instantly invest your money in 500 major American companies, such as Disney (NYSE: DIS) and Motorola (NYSE: MOT).

But once you've done that, take a few chances and supplement your index with growth-stock picks. That's what I'm doing in my own investment account. I don't want all of my money in an index fund, because I'd like my portfolio to grow faster than average, so a chunk of my nest egg sits in a variety of individual stocks.

This strategy should help moderate volatility, and it can also allow you to do well with some carefully chosen stocks -- as it did for me, when I turned $3,000 into $210,000. (It also helped me triple my money in a year.) If you don't believe me, read Paul Elliott on how one stock can change everything. He describes how $1,800, the cost of a fancy TV, can turn into $190,000, the value of an entire home, when you break rules.

Aiming for the stars 
Such returns, which come from classic Rule Breaking companies, are too tempting for me to ignore. That's why I'm still on the lookout for young, dynamic companies that are breaking the rules as they grow and prosper.

The kinds of companies I'm talking about are tomorrow's Google (Nasdaq: GOOG),Amazon.com, and Wal-Mart (NYSE: WMT). Think about how different the world was before them. We would have laughed at the thought of being able to look up almost anything online. We couldn't imagine buying books (and cookware and lawnmowers) on our computers. We wouldn't have been able to find low-cost discount stores in small towns across America. These companies all broke their industries' molds and introduced newer, better systems.

Even Ford was a Rule Breaking company once, too, daring to make a luxury item available to the masses at an affordable price. Just try to imagine a world without cars.

Find a few rockets 
Seeking out and investing in Rule Breakers requires patience and entails risk. However, just one growth rocket has the potential to supercharge an otherwise stodgy index strategy.

This article was originally published on July 7, 2006. It has been updated.

Picking a good investment property

Picking a good investment property
June 22, 2010

Property investing has become a popular Australian pastime with one in ten taxpayers owning a negatively geared property. But just what makes a good bricks-and-mortar investment? It's not about buying any old house or unit, that's for sure, and it's most certainly not about buying something you'd want to live in or even in an area that you necessarily find desirable. Over the next few weeks I will investigate what factors to consider in an investment purchase.

The first biggie is what is better – good price growth, or a high rental return?

There's two ways to measure your return on investment. Capital growth – the change in price over time – and rental yield – how much rent you're getting as a proportion of what you paid for the place. Gross rental yield is your annual rent divided by the purchase price, or value, of the property.

Here's an example: If you bought a flat for $400,000 and you rent it out for $400 a week, you would calculate ($400 x 52) / $400,000. You then multiply that by 100 to get a percentage figure. In this case that gives you a gross rental yield of 5.2 per cent.

People often talk about buying a property with high rental returns. However, most of the professionals who buy property on behalf of investors would advise going for capital growth primarily, and then aiming for a decent yield. Their argument is that just like interest payments left untouched in a bank account, house price rises have a compounding effect when the market is going up. Rent payments on the other hand are generally used to service the costs of owning a property – that is they help to pay interest payments, rates and so forth, and they don't compound. A bit like if you had a bank account and kept withdrawing the interest payments, it might provide an income stream but you wouldn't get the benefits of growth on growth.

Generally people who favour high rental yields will be those investors who have less disposable income that they can use to pay the property's associated bills. They have to have a higher rent-earning property because that's how they can afford to own it in the first place. People who have more spare cash are more likely to be able to go for a property that has higher price-growth prospects but might attract lower rent.

As a rule of thumb, houses tend to grow in price faster than units. However, units tend to attract higher rent. So units can be cheaper to buy and hold, but may not earn you as much growth in the long run.

Likewise, country properties tend to have higher rental yields and lower capital growth than their city counterparts over time. So country properties can be less expensive to buy and hold, but may not earn you as much growth in the long run.

If you're in the market for an investment property, deciding what capital growth rate and what rental yield you will target will depend on your own financial situation.

Buyers agent Stuart Jones of Rose & Jones says when buying city investment apartments he targets 5 per cent gross yield and between 4 and 8 per cent capital growth, combining to give total target returns of between 9 and 13 per cent.

For city houses, Jones seeks gross yields of between 3.5 and 4 per cent.

Jones says it's important to target realistic returns. "People read stories about somebody who bought a property for $100,000 and then in two-and-a-half years' time it was worth $350,000," he says. "People chase that but what they don't realise is it comes off a low base ... there might have been something environmental that went on at the time, like a mine opened up around the corner and all of a sudden you know your place is worth more than you would realistically get in a normal market.

"It's not about finding bargains, it's about getting a good combination of yield and growth and allowing property to do what it does through the passage of ownership, and that is grow."

On a note sure to please tenants, Jones says smart investors need to look after their properties and keep them fresh. "If you take from property and don't give to it, like a relationship, it'll stop giving to you," he says.

Are you an investor? How did you pick where to buy? Do you prefer to invest in houses or units?

Why NHS spending cannot be cut

By Jeremy Warner Economics Last updated: June 25th, 2010

Much comment since the Budget on how David Cameron and his Chancellor, George Osborne, have missed a trick in ring fencing spending on the National Health Service from the coming cuts. If they had spread the planned departmental cuts across all departments, including health, they could have limited the real terms squeeze over the next five years to an average 14 per cent. By protecting health, the biggest spender, they increase the pain to 25 per cent for other departments. Education and defence are also to escape the worst of the squeeze, so on some estimates other departments will get clobbered by more than 30 per cent. Why not spread it around a bit, many have argued. It is not as if health spending couldn’t benefit from reform.

But it is not just the politics of the situation that demands health spending is protected; there is actually a very good practical reason for it too, which is that try as some post war governments have to shave money off the health budget, no-one has ever succeeded in doing it. Mrs Thatcher tried, and so did the spending squeeze of the Lamont/Clarke years. None of them were successful. Health spending continued to grow in real terms right through these periods of fiscal retrenchment. Even if the Government thought it desirable, it would in practice be virtually impossible.

Why is this? Lack of will or determination has little to do with it. Rather, it is because public expectations of health care rises at a far faster rate than other public services, including education. For every treatment which gets more cost effective over time, there are loads of new life enhancing and extending ones coming up in the wings. Patients reasonably demand the latest and the best.

Apologies for the almost illegible reproduction, but as you might be able to see from the chart above, UK expenditure on health, including private, trails other advanced European economies as a percentage of GDP by a considerable margin, and that’s even after taking account of much of the big increase in health spending that took place under the last Labour Government. British spending is infact below the OECD average and as little as half what is spent in the US.

Even accepting that much of this shortfall is caused by British reluctance to finance health spending privately, it is still a quite shameful gap. It’s a problem, but UK citizens expect their healthcare to be state funded. These attitudes plainly need to change. The Government could help matters enormously by establishing some form of state sponsored private health insurance scheme, such as exists in France. Most private health insurance in Britain is a waste of money, with the costs of treatment scandalously recouped through higher premiums in subsequent years.

Failure, or reluctance, to find privately funded solutions makes it virtually impossible to cap ever growing state healthcare spending. The demographics of an ageing population make the pressures even worse. Health spending tends to be back end loaded, with the vast bulk of it falling in the final years of life. As more people survive into old age, the overall costs of the NHS will continue to rise steeply.

Many years ago, I attended a lunch with Professor Richard Doll, the physiologist credited with establishing the link between smoking and lung cancer. Also at the lunch was a then prominent member of the anti-smoking lobby, who complained bitterly about the health costs to the nation of this life threatening habit. To the contrary, replied Professor Doll. Smokers tend to die young before they become a burden on the taxpayer, and net net therefore cost rather less in healthcare than someone who lives to a ripe old age. The same argument might be made about obesity, which costs the nation heavily while the sufferer is still alive but saves mightily in later years because of premature death.

But enough of this macabre analysis. The bottom line is that health spending cannot be cut even if the new Government wanted to. The political challenge rather is that of introducing fair methods of part payment, for though David Cameron may succeed in sustaining public spending on healthcare, he’s never through tax funded means alone going to keep pace with exponentially rising expectations.

http://blogs.telegraph.co.uk/finance/jeremywarner/100006687/why-nhs-spending-cannot-be-cut/