Investing in Domestic vs Foreign Markets in a Volatile Economy

In the 2000’s, we have a true global economy. What does this mean to an investor? It means, for one thing, that in order to have a truly diversified portfolio of investments, you need to consider the added value that foreign investments can bring to your investment portfolio. No one country operates alone in a global economy. Each area of the world may bring something different to the table; nonetheless, whatever happens in one industrialized nation’s economy affects the various economies of the world.

There are advantages and disadvantages when investing in foreign markets. The biggest advantage at present, is that the U.S. Dollar is very weak compared to many foreign market currency; this includes the U.K. Pound Sterling and the Euro. Why does the make it attractive to invest in those foreign markets? It has everything to do with how companies operate in other countries. If their currency is strong, their markets should do well. Also, products that they buy from the United States are cheaper for those companies to purchase.

If you would like to see first-hand how a weak dollar can affect you, take a trip to Europe. Our dollar, which was once strong in Europe, now spends like $.67 in those same countries in which our dollar was once strong. This makes our European vacation a very expensive adventure these days!

Conversely, when Europeans travel here, products are cheap for them to purchase. It works the same way, therefore, for European companies to purchase our products at cheap prices. If a French business needs to buy, for example, 200 IBM computers, their overhead is lowered because the Euro will buy many more IBM computers than the dollar can buy. So, the bottom line profits for those foreign companies that need to buy IBM computers have an advantage over U.S. companies who might need to buy the same products.

Yes, I’ve heard it said that the U.S. market economy is in recession, therefore, buy foreign investments. This is not exactly the reasoning I might use to encourage one to invest in foreign markets. First of all, whatever happens here in the U.S. affects the entire world. If you don’t think it does or will affect the markets of the world, just wait for a day when the Dow Jones is down in a big way and you can bet that the CAC-Quarante, in France, and the FTSE, in London, will open very low in the morning.

The “R” word, and other factors, the sub-prime mortgage debacle for one, have thrown the U.S. market into a tailspin this past few months. No one really knows what to do! The market is up, one day and down big the next. Volatility like we are experiencing right now is a great time to buy low and sell high. It is a wonderful market for experienced, aggressive traders. It can also make you crazy. But if you have the chops for it, and you pick the right U.S. sectors in which to invest, AND if you’re not greedy, you could do very, very well.or not!

As for other advantages of investing in foreign markets; the truth is that the markets of developing markets have been the markets that have had explosive growth, of late. India and China, just to name two particular developing markets, have been on fire. These countries, late to develop a middle-class of consumers, are growing in leaps and bounds now that they have a middle-class with lots and lots of spenders. Do you want to “chase” these markets now that they have already had such explosive growth? How do you know which stocks to pick? Do you know that those developing economies will continue to experience explosive growth in the future, as they have in the immediate past?

Since we aren’t aware of products made in these countries because they aren’t in front of us on a daily basis, I would be more likely to trust an expert in the companies of the world; someone who spends their life researching these companies in far-off lands. Consider a mutual fund with a fund manager who has a good track record, and who specializes in the area in which you want to invest.

Consider two other thoughts:

1. There is the possibility that the companies in countries in which you may want to invest, don’t play by exactly the same rules as the U.S. They could be subject to political upheaval, for example. Other countries also have different rules and regulations regarding reporting practices, and disclosure. How your company reports the profits and losses is not always done with universally accepted practices. When you want to invest in foreign or developing markets, this might be seen as another good reason to invest with a mutual fund manager who knows the ins and outs of this specialized game.

2. When buying U.S. companies, you see the products they produce everyday. It is said to “buy what you know.” In other words, if you don’t understand exactly what it is that a company does, as in the tech explosion of the 90’s, (when we all bought companies who made tech widgets without a clue as to what these widgets did, ) we learned a lesson about not buying what we know; as the tech market came crashing down around us!

How much more complicated is it to understand what a company makes, and how popular a company’s products might be, when we are half a world away? Again, a mutual fund manager with the expertise to navigate these waters makes good sense rather than trying to pick individual, foreign companies ourselves.

So, when thinking of investing in foreign or developing markets, two separate entities, or, in U.S. markets, consider the topics that we have mentioned. Consider, also, the percent of your portfolio that you wish to invest. Balance your portfolio according to your risk tolerance because developing market investments can be risky, indeed. Also remember, you can always invest in U.S. companies that do business IN foreign countries. Here, you have the best of both worlds; as you light up a Marlboro and sip on a Coke!