To Beat the Weak Dollar, Invest Overseas
Six tips for buying foreign stocks
U.S. ownership of foreign stocks has ticked up recently, but by less than 2 percent annually since 2000. And most of that is due to appreciation. Less than one fifth of the typical U.S. portfolio is invested in foreign shares.
Foreign investing is a smart way to diversify. With such a large portion of the world's public companies now overseas, leaving them out of your portfolio "is like saying, 'I'm only going to invest in companies with names that start with A through F,'" says Siegel. Even emerging markets, he points out, boast large, well-run firms like PetroChina—Asia's most profitable company—and Korea's Samsung Electronics.
Siegel advocates a big stake in foreign equities not because of their potential for heftier annual returns but because they can lower the risk of putting too many eggs in one basket. Global stock markets do tend to move together over the short-run, such as the Dow's sell-off in February in response to a sudden drop in the Shanghai index, or the surge in European markets that inevitably follows a big day on Wall Street. But "there's no correlation between them over the long run at all," explains Siegel. "So by diversifying globally, you're spreading your bets and reducing your risk."
It's best to raise your foreign holdings gradually. The first order of business is figuring out exactly how much foreign stock exposure you have, and settling on an appropriate proportion. Most brokerages offer online programs that automatically track your diversification. But be sure to check your U.S. mutual funds, too, as many have increased their foreign holdings recently. (According to Morningstar, the average U.S. fund now holds about 7.4 percent in foreign equities.)
What's the right proportion? Given the stock market's recent volatility, Siegel recommends starting with a 15 percent investment, then using dollar-cost averaging to steadily build your total foreign portfolio to the proportion you've chosen. "Go in over time," he says. "That way you don't have to worry about getting in at the peak."
If you plan to retire soon, or might need to cash out, go light on foreign stocks, as the fact that they're denominated in foreign currencies also represents a risk. "When you cash in and retire, you'll be spending your money in U.S. dollars, so it makes sense to have the bulk of your portfolio in U.S. dollars," says Wall Street Journal personal finance columnist Jonathan Clements. Nevertheless, he advocates keeping about 30 percent of your total stock portfolio in foreign shares.
Divvy up foreign stocks just as you would a U.S. portfolio. Clements suggests putting half of your foreign holdings in blue-chip stocks from developed countries (such as iShares MSCI EAFE-based index fund), then splitting the rest evenly between an emerging market index (like iShares Emerging Markets Index) and a small-cap stock fund (such as T. Rowe Price's International Discovery fund). He and Siegel both favor broadly diversified funds, such as Vanguard's Total International index fund, an amalgam of its European, Pacific, and emerging markets funds, as well as exchange-traded index funds, such as those that track Morgan Stanley Capital International's benchmark EAFE (Europe, Australia, and the Far East), Japan, and Emerging Markets indexes.
For once, don't hedge! Whichever funds you choose, Clements advises, "make sure they don't hedge their currency exposure." Hedging, after all, would dilute the benefits of investing overseas. "Half the benefit of owning foreign stocks," Clements points out, "is that you can diversify the currencies you hold." Then, weak dollar or no, you'll have plenty of pesos to spend when you retire to that Mexican villa.
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