MONEY MATTERS > More on Money Matters > MM 2
By Paul A. Pouliot
Spanning the globe to find investment opportunity
One of the keys to long-term investment success is to capitalize on economic growth. Most investors looking to accumulate wealth make an effort to identify where growth opportunities exist. As nations outside of the U.S. experience more economic development, a number of growth opportunities are emerging in overseas markets.
The growth of the global economy is not new, but in general, it is a fairly recent development. Even into the 1980s, investors putting money to work overseas concentrated most of their opportunities in developed countries like Japan, Germany, France and Great Britain. Other countries such as China and India had little economic development in place. Many smaller countries were only in the early stages of incorporating capitalism as part of their economic system.
A global shift
Much has changed in that time. The U.S. remains the largest economy in the world, but that may not be the case for long. Most dramatically, a number of so-called “emerging” markets, nations that are relatively new to economic development, may become among the world’s biggest in the next 40 years. China recently supplanted Japan as the world’s second largest economy, and may take the top spot from the U.S. in the coming decades. Other developing nations like India, Brazil, Russia, Indonesia, Mexico and Turkey are projected to be listed among of the world’s largest economies over the next 40 years.
The rise of international markets doesn’t mean that all of your money should be invested overseas. But, depending on your situation and tolerance for investment risk, there may be advantages to having some global representation in your portfolio.
Along with tapping into the world’s growth potential, there is another important potential benefit to having a global presence in your portfolio – diversification. Global markets often don’t, over extended periods of time, perform in line with the U.S. market. In the five-year period ending Sep. 30, 2010, the U.S. stock market (as measured by the S&P 500, an unmanaged index of stocks) returned 0.64% on an average annual basis. During that same time, stocks of developed overseas markets returned nearly 2% per year, while emerging market stocks generated annualized returns of 12.7%.
The benefit of diversification can be having some of your investments hold steady or gain ground at a time when other investments are losing money. The gain in one can offset the risk of loss in another, helping to stabilize the portfolio.
Managing the risks
Growth potential and diversification are two good reasons to consider global investments in your portfolio. Yet some caution is advised. There are unique risks to international investing.
One is that many of these markets are less established than is the case with the U.S. This is particularly true of emerging markets such as China, India and Brazil and smaller countries. Their returns tend to be much more volatile over the short term. The risk of a sudden and dramatic loss can be greater than with more conservative investment options.
Another factor is that returns on overseas investments are affected by currency fluctuations. If the dollar loses value in comparison to the currency of the nation where you are investing, it tends to boost your net return. If the dollar gains strength, that typically reduces returns on overseas investments. Currency markets can be wildly unpredictable, so that adds to the potential volatility of international investments.
Consult your financial advisor to determine whether global stocks and bonds fit with your risk tolerance and overall investment goals.
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor’s, a division of McGraw-Hill.
Morgan Stanley Capital International Emerging Markets index, an unmanaged market capitalization-weighted index, is compiled from a composite of securities markets of 26 emerging market countries.
International investing involves increased risk and volatility due to potential political and economic instability, currency fluctuations, and differences in financial reporting and accounting standards and oversight. Risks are particularly significant in emerging markets.
Diversification helps you spread risk throughout your portfolio, so investments that do poorly may be balanced by others that do relatively better. Diversification does not assure a profit and does not protect against loss in declining markets.
Investment products, including shares of mutual funds, are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Paul A. Pouliot CFP®, CHFC®, CASL®, Senior Financial Advisor, An Ameriprise Platinum Financial ServicesSM practice, Ameriprise Financial Services, Inc. 116 South River Road | Bedford, NH 03110 / Office: 603.296.0030 | Fax: 603.296.0028 : firstname.lastname@example.org, www.ameripriseadvisors.com/paul.a.pouliot
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