Sunday, February 12, 2006

International Investing

With the Olympics on, it's a great time to bring up international investing. Sorry but I cannot watch the snowboarding events and take them seriously as an Olympic sport. I think snowboarding was added to keep young viewers watching (X-Games crowd) and to help the US medal count. A lot of laypeople have been concerned with the market attitude of the last year. Some people have thought a contraction would have hit the US markets by now, and others are upset over ho-hum returns. This has lead a lot of small time investors to seek foreign exposure through new vehicles of investing (ETFs) or look for specific multinational corporation stocks (example: BP).

A really quick and easy way to get foreign exposure to your portfolio is to buy broad based ETFs or mutual funds. A super easy, lazy man's portfolio of foreign exposure could include two ETFs (EFA and EEM), and nothing else. EFA is an index ETF, which contains large cap growth and value stocks. EEM is an index ETF of emerging markets holdings. If you are not a fan of indexing and seek an actively managed account, DODFX is a decent mutual fund with strong leadership. One advantage of an index fund over an actively managed fund is that because of it's link to an index, you always know what you hold in an index fund. You do not know what an actively managed fund will shed for risk and pick up with the next deal.

A major reason for investing in foreign markets is to increase diversification. One concern an investor should have is that the foreign exposure it adds has similar cycles as the American market and is closely linked. It might be better to add foreign exposure through EFA and EEM, but also to add exposure from economies that are not linked strongly to the US or are commodity based economies. Some ETFs to look at that are not closely linked and have commodity exposure are EWA, EWC, or EZA. These ETFs follow Australia, Canada, and South Africa respectively. Those ETFs all offer a decent exposure to natural resources and precious metals. If investing in one country worries you, check out EPP which is very similar to EWA but has holdings based in other countries.

Diversity and opportunity for gains greater than US markets are your goals here, and these funds offer that. Several of these ETFs also have good dividends, which if they allow for automatic reinvestment with ETFs soon will become a nice way to build on your investment without thinking about it. Maybe you are worried about the amount of oil exposure in the ETFs. A key thing to think about is that cheap oil (oil <$40) isn't coming back. If oil drops to $50, all of those oil companies will still be making tons of cash and new oil exploration opportunities will become profitable (oil sands in Canada, oil shale in the US). With every investment comes some risk, so choose wisely.

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