Don't let the headlines scare you into dumping foreign stocks

2012-07-01T00:20:00Z 2012-09-28T17:26:12Z Don't let the headlines scare you into dumping foreign stocksBY DAVID NICKLAUS • dnicklaus@post-dispatch.com > 314-340-8213 stltoday.com

Americans are reluctant to invest globally even in the best of times, and these clearly are not the best of times.

If you read the headlines out of Europe, it's easy to conclude that the whole continent is just too risky right now. Japan is an economic laggard, and even China and Brazil look like they're slowing down.

Why not dump those international funds you bought back when the global economy was booming? Things may not be exactly rosy in the U.S.A., but at least you understand the economy and the companies that operate in it.

That sort of thinking, financial experts say, is a big mistake. Europe certainly faces some challenges, but they're fully reflected in European companies' stock prices. If you bail out now, you may miss the opportunity to pick up some world-leading companies at bargain-basement prices.

Besides, international diversification hedges some risks that are inherent in an all-U.S. portfolio. What if Congress drives us off the fiscal cliff that everyone is talking about? What if a strong dollar makes American companies' exports uncompetitive?

You don't have any more control over those problems than you do over the European financial crisis, but you do have control over your portfolio.

Dividing your nest egg among various baskets – including one for international stocks – is a proven way to reduce risk.

“There are always time periods when one market does worse than another market,” says Rick Hill, managing principal at Hill Investment Group in Clayton. “I can't deny that there are a lot of issues in Europe, but that doesn't change our basic premise that it's best to have a globally diversified portfolio and stay the course.”

Hill puts 40 percent of his clients' stock portfolio in international funds.

At Edward Jones, investment strategist Kate Warne urges clients to put up to 30 percent of their stock portfolios in international funds, and to tune out recent news when making that decision.

“In many cases, you are buying shares in big international companies that operate not just in their home countries but around the world,” she said. “We think this is an opportunity investors should be taking advantage of rather than shying away from.”

International investing does introduce some risks that investors might not be used to thinking about. Currency movements will affect your returns – even if a stock does great in, say, pesos, you can lose money if the peso depreciates against the dollar. Political risks also loom large, especially in emerging markets like China and Russia.

David Walther, director of wealth services at Purk Advisors in Richmond Heights, says he doesn't worry too much about currency risk. “It's going to go both ways over time,” he says.

Walther points out that price-earnings ratios in Europe are about one-third less than in the U.S., something that should appeal to bargain-hunting investors. And dividend yields, at 4 percent in Europe, are almost double the U.S. average.

“The value is there if you have the patience and you are investing longer term,” he said. “I definitely wouldn't pull back on international.”

Walther recommends that investors put about a third of their stock portfolio outside the U.S., owning both developed-country and emerging-markets funds.

If you follow his advice, you'll be much more globally diversified than your neighbors: Overall, U.S. residents invest just 13 percent of their money overseas.

U.S. companies, however, account for only 45 percent of global stock market value. If you ignore the other 55 percent, you do so at your own peril.

Read more from David Nicklaus, who is the business columnist for the Post-Dispatch. On Twitter, follow him @dnickbiz and the Business section @postdispatchbiz.

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