How to Invest outside the Dollar

International stocks, they are not American, so they must be risky. American investors must face up to it, we are in a global economy, we are no longer the only game in town. Jim Cramer the Harvard educated everyman, erstwhile stock market guru is fond of saying that he’s going Pimpin all over the world for stocks. Even the fabled Warren Buffett has taken notice, if your not exposed to the world stock market you may be shorting yourself.

I am no Jim Cramer, and certainly no Warren Buffett, I am simply a individual investor , I have but one portfolio to manage, my own. However, that portfolio means a lot to me, I am averse to risk taking regarding my investments. Although, risk is inherent in any investment one might own, exposure to risk is a necessity. Each investor should carefully analyze their investment portfolio’s, and their own ability to suffer losses related to investment risk. Each investor should go about managing their investments based upon the level of risk they are comfortable with.

Novice investors, those starting out investing on their own would do well to shy away from investment opportunities with high levels of risk. International stocks can indeed be fraught with risk, and analyzing international stocks can be challenging. Obtaining accurate information on individual companies in the global marketplace can be difficult.

An additional risk factor with investing in international stock is related to the strength of U.S. currency. When the dollar is weak your international investments might provide greater returns. How does this work? Here is an example: when an investor receives a dividend or sells international stock, they must convert the money they receive to dollars. When the foreign currency is strong in relation to the dollar, your return on investment is enhanced, your able to buy more dollars with your foreign earnings. As the foreign currency becomes weak versus the dollar your investment depreciates because your foreign earnings will now buy fewer dollars.

Other concerns related to foreign investments include, changes in market values, political concerns regarding the country the company is located in, and changes in the countries economy. As you can see there is some validation related to the risk of investing in international companies. Despite these challenges, investors who disregard the international market place will miss an essential element portfolio diversification.

Simply put, no investment or market performs well at all times, when one market or market sector is thriving, another may be falling, when one country’s economy is growing, another may languishing. It is diversification among asset classes, and markets that shelter us from losses, if our investments are not diversified we can suffer extreme losses.

Therefore, international stocks should find their way into your investments portfolio. Because of the factors listed above regarding international companies most investors may only place a small percentage of their money in international stocks or funds. Not only do I prefer this approach, I prefer to invest in large international companies that pay a dividend. Dividends offer a hedging effect against the volatility of international companys and the markets they operate in. That is, during periods of underperformance you will receive a return on investment despite the vicissitudes of the companys environment or performance.

The following are 2 international companies one well known, and one not so well known, that you might be interested in researching on your own. Honda Motor Company (HMC), Veolia (VE). Honda Motor Company (HMC) sits in the sweet spot of the automotive industry, it manufactures high quality products for the masses, it’s cars are highly fuel efficient (see any article on $75.00 / barrel oil), it’s reputation in emerging markets is outstanding (branding). HMC is expanding it’s presence and brand in China. I have owned shares of HMC since January 2006.

HMC Industry
P/E 13.92 14.86
EPS 11.77 3.86
Div. Yield 1.77 2.12
5yr Div. Growth 39.88 8.69

Veolia (VE) Veolia Environnement is engaged in environmental services through businesses, such as the processing of waste, water distribution and related services, network operation and passenger transport and energy services (heat distribution, thermal services and public lighting). Veolia Environnement’s operations are conducted primarily through four divisions: Veolia Water (water), Onyx (waste management), Dalkia (energy services) and Connex (transportation). In April 2007, the Company acquired Sulo Group in Germany. The company currently provides water services to 19 million individuals in China.

VE Industry
P/E 28.96 29.92
EPS 19.82 9.58
Div Yield 1.86 2.29
5yr Div Growth 13.81 6.22

Each of the above companies meet my requirements for international investment opportunities. I believe that individual investors should formulate their own baseline criteria for identifying potential international companies they might invest in, and the percentage of international stocks they feel should comprise their portfolio based on their risk profile.