Four out of four investment experts agree: Emerging foreign markets are the place American investors should be looking to put their dollars to work.
That was the lesson if you read investment expert John Mauldin's recent "Thoughts From the Frontline." Mr. Mauldin and his roundtable of research analysts concluded quite without debate that:
- "For the first time in a century the U.S. is not the locomotive of global growth -- we are the caboose, bringing up the rear."
- "The emerging world in general and China in particular will continue to grow strongly."
- "China, India, and probably Vietnam will continue to lead Asia's strong economic growth and the region, with its large population, is now the primary engine of global GDP growth."
And American investors are getting the memo
At the same time, this is old news. According to the Investment Company Institute (and reported by Jaclyne Badal in The Wall Street Journal), "87% of the money invested in stock funds [in 2007] has gone into international products."
Of course, even if you're among the many dumping money into international mutual funds, you may not have your bases covered.
Do we invest in China? Yes. Sort of. No.
Another recent Wall Street Journal report revealed that the average "China" stock fund is earning roughly half the return of the Shanghai composite index. Why the difference? Because these funds aren't as weighted toward China as investors think they are. Rather, there's a great deal of exposure to multinational companies and stocks that trade in Hong Kong.
Fidelity China Region (FHKCX), for example, doesn't have a single stock among its top 25 holdings that calls a China exchange its one and only home. Its top holding -- Taiwan Semiconductor -- is domiciled in Taiwan and does 60% of its revenue in North America. Other large positions include multinationals HSBC Holdings
But that's why it pays to read the fine print when investing in funds. "China region" doesn't necessarily mean China.
The more things change ...
Then there's the fact that despite the recent headlong rush into foreign equities, many American investors continue to hold the same old stocks. The most widely held stocks among the largest mutual funds continue to be names such as Altria
Any of those names look familiar? If you own funds, you likely own one if not all of them -- and in hefty doses.
Speak softly ...
Yet many financial pundits have been spooked by the recent rises in international markets. They're prophesying near-term volatility on TV, in magazines, and elsewhere, and advising caution for new investors entering the markets.
And I don't disagree.
But there will always be volatility in the stock markets -- American or otherwise. While you should be cautious with your savings, you can mitigate some of that risk by taking a long-time horizon. That means at least three to five years and optimally the next decade or more.
... but carry a big stake in foreign stocks
If you're willing to do that, then it's absolutely crucial that you start or continue investing in foreign markets. As Mauldin noted, "More and more investors must seek to be global investors."
And according to Mauldin, you may need to be more of a global investor than you think: "There is no hard and fast rule for what your foreign exposure should be, but if you can stand the volatility and have access to world-class managers who can do stock selection ... then 25% to 40% of a portfolio might be appropriate."
That's a lot of percent
40%? That's right. Not coincidentally, that's the same number that Wharton professor Dr. Jeremy Siegel has been advising. And as demonstrated above, you may not get there by owning so-called "foreign" mutual funds.
Of course, if you're uneasy about picking your own foreign stocks, you can get access to a world-class international stock picker all your own by joining the Motley Fool Global Gains investment service. Advisor Bill Mann has years of experience living, working, and investing abroad, and he recently returned from a research trip to India, China, and Taiwan.
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This article was originally published July 12, 2007. It has been updated.