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Web of Finance
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| Jun 25, 2002 2:20 am |
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re: re: re: Global Investing - Pros & Cons |
Keith Butler
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FACT: In the past 20 years, the United States has never been the top performing market in the world in any calander year.
> Ken Nakagama wrote:
> Okay this is all great stuff.
>I may not have cought the complete picture though.
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>But Adrian- if we didn't have diversification, the industry wouldn't have a better reason to churn our big investment funds for more commissions. J/K
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>What I can note is that International markets are mostly outpacing our own. (US)
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>For Institutions, it is more a part of accepted business practice that guides.
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>For Personal investing, it is a matter of comfort level.
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>I don't buy bonds or CDs or any of the other instruments that are safe ; ) I probably only have some of that Indirectly through Mutual funds.
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>Another crack on Federal Retirement is that I am in the Federal 401K program as well. I couldn't believe how poorly the mutual fund performance was compared to other programs I am active in or vested from. They have changed that(this year) to offer more; but FED employees money hasn't really grown for a very long time.
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>So when Senator "whoever" looks at retirement changes,(isn't part of the dot.com generation and hasn't left DC in 15 years as the Majority Whip) scratches his\her head and wonders if individuals would do a better job than a financial professional. (that didn't take ethics in College)
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>> Adrian Scott wrote:
>> ok, one question is, who believes in portfolio theory?
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>>the other important thing is that people realize we are all exposed to foreign exchange risk and
>>are investing in currencies whether we realize it or not! :)
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>>i think diversification is bunk as a risk mgmt strategy. :)
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>>-a
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>>ps (ishares are cool)
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>>> Guan Seng Khoo wrote:
>>> Global Investing (extracted from PremierInvestor.com)
>>>
>>>The decision to invest in foreign markets depends on many personal factors. Portfolio size, investment horizon, and financial goals can all play an important role in the decision to invest globally. In many cases, unfamiliarity with foreign market investment vehicles tends to dissuade investors from actively pursuing international diversification. However, there are many easy ways to invest in foreign markets for the average investor. We will talk about these products as well as the benefits and risks associated with international equity investing.
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>>>The primary argument in favor of global equity investing is diversification. Diversification across the world's equity markets can produce a portfolio with more appealing risk/return characteristics. Portfolio theory tells us that two assets that are not perfectly positively correlated will reduce the risk in a portfolio of assets, as measured by the variance of returns. The incentive to invest globally is analogous to diversifying a domestic stock portfolio across different geographic regions to reduce exposure to one particular economic locality.
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>>>However, the benefits of global diversification are not cut and dry. Some studies find that during adverse market events such as crash, currency crisis, and war, the correlation between global markets actually increases. So just when you needed it most, the portfolio diversification benefits are falling as the correlation among the world markets increase.
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>>>Another argument against lower global market correlation is the increasing interdependence of the world's economies. No longer is Japan or Europe isolated from a U.S. economic slowdown. As communications and technology tie our economies closer together, the argument for diversification among the world's equity markets doesn't hold as much water.
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>>>While you can probably find a study that refutes almost every accepted investment principle there is, the currently accepted investment tenet holds that there is some benefit to international equity diversification. With that having been said, let's discuss some potential risks to foreign market investing and then go over some investment strategies that can be used in international investing.
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>>>Risks
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>>>An investor faces a whole host of new risks when considering foreign markets for a potential equity investment. The most obvious risk is currency risk. Even though a portfolio of international assets might outperform an equivalent domestic portfolio, any currency movements could actually result in the international assets underperforming the domestic portfolio. Hedges can be implemented but they are costly and can cut into potential returns.
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>>>Another risk the individual investor faces is different international accounting standards. Different countries might have different asset valuation standards and revenue recognition principles. For this reason, investors should not attempt to us ratio analysis to evaluate international stocks. Since the ratios can't be compared across borders, this valuation technique could result in severely impaired investment decisions. Instead, investors should focus on identifying relevant cash flows and applying them to a discounted equity valuation model.
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>>>An additional hurdle to international investing is potentially different tax treatment. Investors should consider any additional tax burdens from investing and taking profits in foreign countries.
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>>>International investors also face operational risk. Foreign exchanges have different clearing procedures and in some cases can limit or forbid the repatriation of foreign capital, as was the case recently in Malaysia.
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>>>Investment Strategies
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>>>An investor pursuing international exposure should decide initially whether or not to employ the services of a professional money manager. International investing is prone to many hazards and pitfalls and takes a lot of time and effort. If the decision to use a professional money manager is made, the investor must decide on the type of investment philosophy before deciding on a specific money manager. Money managers either pursue active or passive investment strategies. An active manager makes decisions concerning market allocation, security selection, and currency bets in an attempt to increase return. Passive investment managers attempt to mimic the performance of an international or country specific index. The main issue a passive manager faces is minimizing tracking error between the their portfolio and the actual index.
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>>>Additional strategic alternatives need to be decided such as the decision to hedge and which markets should be weighted the heaviest. These long-term decisions should be made prior to investing. Also, the extent to which tactical adjustments are made in the international portfolio should be discussed in advance, so that manager and investor share the same philosophy.
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>>>Many economies around the world are growing at incredible rates. These developing countries can offer excellent investment potential if the investors educate themselves about the risks and rewards of international equity investing.
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>>>Investment Vehicles
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>>>There are many vehicles available for investors wishing to pursue international diversification. International mutual funds offer instant firm-specific diversification due to the large number of stocks in their portfolios. Further, their focus can be market specific, such as Japan funds, or regional (Far East fund) or global in perspective. Finally the investor receives professional management for 1-2% of assets.
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>>>Another option available to investors is specialized products offered by financial firms or exchanges, e.g., Barclay's Global Investors has developed a new exchange traded product called iShares. These securities are index funds that can be actively traded like stocks. These products offer an easy way to invest in many of the world's larger markets. For more information, investors should visit www.ishares.com.
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Private Reply to Keith Butler (new win) |
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