Today's Strong Buys: International Edition

Last year's international stock markets churned out returns that dwarfed those of the U.S. markets. What's more, countries at the top of the list beat anything that the broad U.S. markets have ever provided. Take a look:

Index

Change

China

107.0%

Russia

51.0%

India

49.1%

Brazil

39.5%

Mexico

37.6%

Hong Kong

34.5%

Germany

32.6%

France

31.0%

United Kingdom

26.5%

South Africa

18.2%

United States

13.9%

Japan

5.2%

Israel

(6.4%)

Turkey

(10.5%)

Source: WSJ.com.

Seeing these numbers might have you thinking, "Now is the time to get in," and you can by buying the indexes of pretty much any country: iShares MSCI Singapore (NYSE: EWS  ) , iShares MSCI Hong Kong (NYSE: EWH  ) , or iShares MSCI Taiwan (NYSE: EWT  ) , for example. But you'll also hear about another very, very popular way to go about it -- one that more people with more credentials and more years of experience will tell you.

And they are, almost certainly, dead wrong.

The answer that you are most likely to hear when talking to financial advisors about how to invest internationally is: "Buy some mutual funds. I can help you find the best ones."

This advice, proffered by nearly any commissioned financial advisor with whom you might speak, is almost mathematically certain to result in your missing out on the promises of international investing.

A new study (link opens a PDF file), grippingly titled "Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry," is the most detailed work ever conducted comparing the record of financial advisors with those of folks who make their own mutual fund purchases. It shows that this country's financial advisors truly cost investors.

Here are the returns for 1996 through 2002:

Financial advisors:

2.9%

Individual investors:

6.6%

Raw returns, net of all expenses.

Wow. Less than half? Really?

The study measured the results of literally trillions of dollars of mutual fund purchases and included participation by the best-known and most trusted names in the industry. It concluded that brokers do not find better-performing funds than individuals, do not allocate assets among different asset classes better than individuals, and do not display fewer biases toward the "hot" stock than individuals.

This is true even if you don't count the fees of the brokers in the performance. In 2002 alone, investors lost about $40 billion to mutual fund sales and management fees.

These results are particularly troubling if you want to take a rational approach to earning potentially substantial rewards through international investing. Of all the categories of mutual funds, international funds have the highest annual fees and expenses. Moreover, the sales and management fees of mutual funds explain virtually all of the difference between what you'll get on your own and what you'll get through a broker if you choose just average-performing stocks.

The "strong buy" recommendations from 1999 to 2001 were funds holding Nortel Networks (NYSE: NT  ) , TD Ameritrade (Nasdaq: AMTD  ) , Priceline.com, and Amazon.com -- worthy companies, perhaps, but not at that moment in time. They just had great trailing results. Today, juiced by returns from China Petroleum & Chemical, Comtech Group (Nasdaq: COGO  ) , American Oriental Bioengineering (NYSE: AOB  ) , and many others, the China funds continue to be the hot sell. They are today's most popular "strong buys."

You certainly want to be diversified into the exceptional international returns of the next decade -- but if history is any indication, brokers as a group simply won't help you find today's reasonably priced global opportunities. They're far more likely to try to sell yesterday's winners. At Global Gains, we look at today's market very differently. Be our guest free for 30 days to see how a contrarian approach makes the most sense for your portfolio.

You can sample The Motley Fool's international investing service, Global Gains, free of charge for 30 days. Click here to learn more.

This article was originally published Jan. 17, 2007. It has been updated.

Bill Barker does not own shares of any companies mentioned. Priceline and Amazon.com are Stock Advisor picks. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 538586, ~/Articles/ArticleHandler.aspx, 12/22/2014 7:12:59 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement