To Beat the Weak Dollar, Invest Overseas
Six tips for buying foreign stocks
If only you'd listened.
Two years ago, Wharton finance professor and investing sage Jeremy Siegel raised eyebrows when he suggested that American investors keep 40 percent of their stock holdings in foreign shares—more than double what the average investor owned at the time.
If you had followed his advice and traded in, say, an index fund tracking the S&P 500 for one that follows the global markets (like, for example, Vanguard's Total International Stock Index Fund), you'd have more than doubled your gains. If you had stuck your neck out a bit further and bought into, say, an index fund that tracks emerging markets (like Vanguard's Emerging Markets Index), you'd have trounced the S&P fourfold—and nearly doubled your money.
Still, if you prefer the slow boat to China, it's not too late to hit the water. Until now, the steady decline of the U.S. dollar has been a big reason to own foreign stocks, since they're denominated in other currencies: The value of the greenback has fallen by nearly 15 percent over the past two years, and by nearly a third since 2003. And investors from Warren Buffett to George Soros predict the dollar will stay weak, as the nation's $8.9 trillion debt grows by more than a billion dollars a day. That means an investment in foreign stocks comes with a built-in currency dividend, at least in the short term.
But there are other important reasons to invest overseas, besides the currency bump. Here's what you need to know to invest smartly in foreign stocks:
It's the global economy, stupid. The case for buying foreign stocks has less to do with the shrinking dollar and more with the fundamental forces behind its decline. In many countries, the economy is growing far faster than the paltry 3 percent annual growth we're now logging in the United States. Markets in places like China and India aren't simply "emerging." They're rapidly joining—and even overtaking—the developed world as their production and consumption surge and their populations become more prosperous.
Meanwhile, mainstream economies in Europe and Japan are performing better than they have in decades, as behemoths like Japan's Toyota and Spain's Telefónica take larger shares of the world's markets. Little wonder that, for the first time ever, the total value of the European stock markets recently surpassed that of U.S markets, which now represent only about one third of the $51 trillion in global equities. That's down from a 46 percent share a decade ago.
Americans underinvest overseas. The reason, say economists, is the same fear of the unknown that has long kept two thirds of Americans from traveling abroad. Known as the "equity home bias," the tendency to keep a disproportionate share of your investments at home is rooted in a host of long-held but largely irrational fears. Hostile foreign governments, for instance, might seize the assets of private companies, as Venezuela did recently—yet the companies most affected were based in the United States, not other countries. U.S. investors also tend to feel that foreign accounting and legal standards are below those in the United States—even though our system produced the Enron and WorldCom debacles. Or they worry that financial information about foreign companies is simply too hard to come by, even though Reuters, the Financial Times, and other companies have it covered.
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