Today's Strong Buys: International Edition

Last year's international stock markets offered returns that dwarfed what the U.S. markets returned. Take a look at some of the most impressive international ETFs of the year:

ETF

2007 Return

iShares Australia (EWA)

28%

iShares Canada (EWC)

28%

iShares Hong Kong (EWH)

39%

iShares Latin America 40 (NYSE:ILF)

48%

iShares Emerging Markets (EEM)

33%

iShares Malaysia (EWM)

44%

iShares South Africa (EZA)

15%

iShares South Korea (NYSE:EWY)

32%

PowerShares Gldn Dragon Halter USX China

63%

Data from Morningstar.

Seeing these numbers might have you thinking, "Now is the time to get in." It might be, but how should you pursue global investing at this moment? There is one very, very popular way to go about it -- one that more people with more credentials and more years of experience will recommend. And they are, almost certainly, dead wrong.

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

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

A recent 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 results for returns for 1996 through 2002:

Financial advisors:

2.9%

Individual investors:

6.6%

*Raw returns, net of all expenses.

Wow. You get less than half with an advisor? Really?

It's true. 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, allocate assets better among different asset classes, or display fewer biases toward the "hot" stock than individuals do.

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 rationally want to get started earning the substantial potential rewards available through international investing today. 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 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 Microsoft, Dell (Nasdaq: DELL  ) , and Amazon.com (Nasdaq: AMZN  ) -- worthy companies, perhaps, but not at that moment in time. They just had great trailing results. Today, juiced by returns from China Petroleum & Chemical, Baidu.com (Nasdaq: BIDU  ) , China Telecom (NYSE: CHA  ) , and many others, the China funds are going 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.

Bill Barker does not own shares of any companies mentioned. Dell and Microsoft are Motley Fool Inside Value recommendations. Amazon.com is a Stock Advisor choice. Baidu.com is a Rule Breakers choice. The Motley Fool has a disclosure policy.


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