Last Friday's announcement that Standard & Poor's downgraded the credit rating of U.S. debt to AA+ sent tremors through the markets over the weekend. But the longer-term implications of the move raise an important strategic question you need to answer: Is investing in the U.S. still safe, or should you start focusing solely on overseas investments?
A line in the sand
Now to be clear, I'm not suggesting that you close out all your FDIC-insured bank accounts and get a banker in Geneva or Zurich to open up a secret numbered account. Given all the attention that Swiss banking giants UBS (NYSE: UBS ) and Credit Suisse (NYSE: CS ) have gotten in allegedly aiding U.S. citizens to evade IRS taxation, such a move might well not be worth the benefits anyway.
But considering how much of your money to keep in U.S. stocks and bonds is a perfectly reasonable thing to do in light of the S&P downgrade. Here's why:
- Many people have most or all of their investments in U.S. stocks and bonds.
- Nearly all working Americans get paid for their work in U.S. dollars. Moreover, if your employer focuses on domestic customers, your job is dependent on the health of the U.S. economy.
- When you retire, all of your Social Security benefits will be in dollars, and in all likelihood, any pension you receive will as well.
In other words, if you're a typical investor, nearly all of your financial exposure is tied to the fortunes of the U.S. economy. In that sense, a credit downgrade hits you just as hard as it hits the federal government. And more importantly, it hits millions of your fellow citizens as well.
Get outta here!
In fact, U.S. investors who've stayed close to home have suffered for more than 10 years from lackluster investing returns. Bonds have performed fine, but U.S. stocks are flat to down since 1999 and show no signs of jumping in the near future.
Of course, not all overseas investments have fared better. Banks throughout Europe, such as Allied Irish Banks (NYSE: AIB ) , Bank of Ireland (NYSE: IRE ) , and Spain's Banco Santander (NYSE: STD ) have just as much to lose from a joint U.S. and European financial crisis as anyone.
But when you focus on emerging markets, you'll notice a couple of trends. First, fast economic growth has boosted stock prices significantly over the years. Second, soaring currencies have added to those gains for U.S. investors. Combine the two, and it makes a simple investment in emerging market ETFs like Vanguard MSCI Emerging Markets (NYSE: VWO ) or iShares MSCI Emerging Markets (NYSE: EEM ) seem like a no-brainer, with double-digit average annual gains going back to the turn of the millennium.
A falling tide sinks all ships
What the past few weeks have suggested, though, is that everyone's in the same boat when it comes to the current crisis situation. Emerging markets have fared no better than stocks in Japan, the U.S., or Europe as investors seek to get rid of any type of risk.
The key to success is to keep your eye focused on the long run. If the current bear market move continues, investors are likely to throw out excellent stocks along with lousy ones. If you believe that foreign markets generally and emerging markets in particular will eventually come out of the crisis stronger, then you'll soon have an excellent opportunity to buy in at bargain prices.
Go west (or east)
For decades, the comfort of investing close to home also came with returns that rivaled any investment on the planet. But lately, U.S. stocks haven't given you the rewards you deserve from investing. That doesn't mean that the U.S. is doomed, but it does mean you should add some foreign exposure to your portfolio. In the long run, you'll be glad you did.
It's also smart to make sure you have the right stocks in your portfolio. The Motley Fool has five stocks it owns that it thinks will perform strongly for you as well. They're in this free special report, which is yours free and only a click away.
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter here.
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