International Investing Teaches Us a Portfolio Diversification Lesson
April 4, 2008
You know things aren’t good financially when you stop measuring which investment has made the most money and you start looking for the ones that have lost the least. A recent article in Forbes called “Is Global Investing Dead” touts the DOw & S&P 500 as having “better” losses than major international indexes:
“The blue chip Dow Jones Industrial Average and the large-cap Standard & Poor’s 500 both have lost much less than their major European and Asian counterparts of late, suggesting that the five- or six-year run in which foreign bourses routinely thrashed the S&P and the Dow has ended”
I definitely understand what he’s talking about, our international funds, Dodge & Cox International, American Century International Growth, Oakmark International, have all dropped significantly since last year, down 16 – 32% since early December as you can see in the image of Oakmark International below
However, I think the important lesson from the article isn’t “be wary of international stocks” but rather to remember that all hot investing trends end sooner or later. I increased our exposure to international stocks probably halfway through the run up in global investments partially because they were doing so well but also to further diversify our portfolio across geographic regions and markets.
Although the US is still the major player in the financial world today, I think the huge gains in international markets were a sign it’s becoming more of a global economy and that there are many places outside of the US that have massive potential for the future.
That being said, I’m glad I didn’t move half our portfolio into international stock funds just because they were on a tear. I increased our global investments by 5% but I know some speculators that piled a ton of money into foreign funds and are probably kicking themselves now. Some people at work moved most of their 401k into international funds and were gleeful with 22% returns but then saw all that appreciation wiped out last December.
The lesson I learned from the rise and drop of international stocks over the last 6 years is that you should diversify your investments across industries, market capitalization, investment approaches, and markets but don’t get carried away by big growth in any of these areas. No growth spurt lasts forever so don’t chase them.
All posts by Ben Edwards
The problem is most people don’t get out in time or get in too late. The people who bought Apple and Google stock in December must be kicking themselves. International equity is a great way to go, but it’s also an outlet which will run out of steam at some point. In a couple of years, hopefully China, Brazil and Turkey won’t find themselves in the same position as the USA is in now.