Going Global

By Aaron Levitt | July 25, 2011 AAA

It seems that a majority of investors root for the home team. Hometown bias is rampant within U.S. portfolios, with only 40% of Americans owning any foreign stocks or bonds at all. It makes sense that the United States would be featured so prominently in many portfolios. After all, it's the single largest world economy, and its financial markets are some of the most liquid. However, investors that only focus on one market are missing out. In today's complex global economy, you're just as likely to find Swiss firm Nestle (OTCBB:NSRGY) products in your pantry or a Honda (NYSE:HMC) in your driveway. From a portfolio standpoint, it pays to break out the passport.
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Breaking Out the Passport
The United States accounts for just under 20% of the world's economic output. Yet, the top 10 emerging market nations, including China, India, Brazil and South Korea, already account for more than 33% of this output. For investors, it's never been more important to have a globally oriented portfolio. Our bias towards our own home markets is also costing us some serious money. According to research firm Ibbotson Associates, over the last decade, a 60% stock portfolio with one third of its stocks invested in foreign firms would have outperformed a 60% stock portfolio allocated strictly to just U.S. stocks by 1.2% a year. That difference is enough to add an extra $200,000 for a $1 million portfolio over those 10 years. (Without this risk-reduction technique, your chance of loss will be unnecessary high. For more, see The Importance Of Diversification.)

Gains aside, there are other reasons investors should go global. Foreign firms have traditionally held a more dividend-friendly culture, paying them to shareholders rather than keeping them as retained earnings. For those seeking income solutions in our zero interest rate world, global stocks should be considered. The popular iShares MSCI EAFE Index (NYSE:EFA), which tracks international developed markets, currently yields 2.81%. This compares to the 1.84% yield of the S&P 500. In addition, the expected long-term decline in the U.S. dollar is another reason why investors should go global. By investing in nations with good long-term prospects and appreciating currencies versus the greenback, investors can boost their returns and dividends.

Book a Flight
With many financial planners suggesting keeping between 35-50% of a portfolio's stock holdings in foreign companies, the average investor has a lot of work to do. Luckily, there are plenty of options for retail investors to gain that weighting.

The Vanguard FTSE All-World ex-US ETF (NYSE:VEU) could be considered a one-stop-shop for global investing. The fund tracks nearly 2,180 stocks of companies located in 46 countries outside the United States. This includes both developed and emerging markets. Top holdings for the fund include drug maker Novartis (NYSE:NVS) and oil superstar Petroleo Brasileiro (NYSE:PBR). Expenses for the fund are a dirt cheap 0.22%. Just as important is exposure to international small cap stocks. The SPDR S&P International Small Cap (NYSE:GWX) allows investors to tap into this forgotten asset class. (ETF's are a viable alternative to mutual funds, but before you invest, there are a few things you should know. For more, see Using ETFs To Build A Cost-Effective Portfolio.)

Don't Forget Bonds
Given the debt problems facing the U.S., some analysts believe that overseas bonds carry less risk than U.S. bonds offering similar rates. In addition, based on various economic conditions, foreign bonds can have attractive interest rates. The iShares S&P/Citi Intl Treasury Bond (Nasdaq:IGOV), SPDR DB International Inflation-Protected Bond (NYSE:WIP) and PowerShares Emerging Markets Sovereign Debt (NYSE:PCY) allow investors the ability to play a variety of foreign bond types and issuers.

Add Some Spice
For portfolios, the addition of foreign investments doesn't need to stop there. Both commodities and real estate investments have gained more prominence in many portfolios over the years. The SPDR Dow Jones International Real Estate (NYSE:RWX) and iShares MSCI ACWI ex US Materials Index (Nasdaq:AXMT) provide investors with the ability to add more global flair to the sectors.

The Bottom Line
Most investors never stray away from their home nations when it comes to portfolio construction. That truly is a shame. Adding a swath of international investments to a portfolio adds a host of benefits. The previous funds are a great examples of how investors can get their portfolios more global. (If you diversify too much, you might not lose much, but you won't gain much either. For more, see The Dangers Of Over-Diversifying Your Portfolio.)

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