Investing abroad
NEW YORK – It’s a scary time for Americans to take their money outside the country, not simply because the weak dollar has made travel more expensive, but because the volatility that has plagued Wall Street for nearly a year has also touched many investments abroad.
Stock markets in corners of Europe are down roughly 15 percent to 25 percent for the year and in parts of Asia, more than 50 percent. But pullbacks do bring opportunity and so, even with further declines, investors who take a long-term view could come out ahead.
Some of the top headline-getters are now drawing attention for the scope of their pullbacks. China, with a burgeoning middle class the size of the entire U.S. population, still might make a powerful case for growth, but China region mutual funds were off 25.4 percent in the first half of the year, according to fund tracker Lipper Inc.
Analysts say the key to investing abroad is to have a mix of investments and not put too much money in any one market.
Vladimir Milev, an investment analyst at Metzler/Payden who focuses on Europe, said investments from developed markets in Western Europe and those still developing in Eastern Europe would likely work best for many investors. But investors should realize, he said, that differences can be stark even within one region. Growth seen in Poland and Russia, for example, is well ahead of that of markets in Estonia and Hungary.
Just as in the U.S., investing abroad used to be an easier call. The magic markets that could juice a portfolio with double-digit returns are harder to come by. A more careful approach is needed now that all markets are not simply going up, Milev said.
“Know what you’re buying and why you’re buying it,” he said.
The pitfalls of investing in only one or two countries can be severe, said Bill Rocco, a senior analyst at investment research provider Morningstar Inc., pointing to pullbacks in China and India this year.
“People who overinvested in those have had a very rough eight months,” he said. “It’s a reminder that there’s no perfect market. Everything goes up and down.”
Rocco thinks fundamentally that it’s wise for investors to put money outside the U.S. because of all the opportunity.
“There are a lot of great companies out there,” he said. “You want exposure to them and the way to do that is through international funds.”
But Rocco also noted that investing abroad isn’t an easy way to dodge the troubles at home.
“You shouldn’t expect your foreign funds to be in the black when your domestic ones are in the red,” he said, but added, “over time, I think you’ll get some diversification value.”
He suggested that investors looking to build their foreign holdings look for a fund of foreign large capitalization stocks. While most companies will come from developed markets, foreign large cap funds often draw about 10 percent of their holdings from emerging markets.