Lots of people think they have a diversified portfolio. But do you really own enough different investments to be truly diversified?
For instance, you might think you're diversified because you own stocks in companies as varied as Starbucks (NASDAQ:SBUX), Home Depot (NYSE:HD), and Southwest Airlines (NYSE:LUV). It seems diversified: you've got food and beverages, home improvement retailing, and airlines -- all rather different businesses.
But in a few key ways, it's not as diversified as you might think. All the companies derive much of their income from American consumers. All are strongly tied to the U.S. economy. If that economy slumps, as it has recently done, then people will fly less, will cut back on their expensive lattes, and will put off remodeling their kitchen.
That's why we, and other financial advisors, recommend adding some international holdings to your portfolio mix. One of the most comfortable ways to do that is through some big American companies that derive a lot of their income internationally. PepsiCo (NYSE:PEP), for example, generated about 48% of its revenue outside the U.S in 2008. For McDonald's (NYSE:MCD), that number was 66%, and for General Electric, 53%. Still, these companies remain significantly tied to the U.S.
Emerging profits
Another option is to invest in foreign stocks. In particular, emerging markets such as China, Brazil, and India have maintained fairly strong economies that don't always move in lockstep with our own. They also offer the chance of greater returns, since they're generally growing at a faster clip than our more mature economy. And best of all, investing in them doesn't mean you'll only be invested in tiny companies that make insignificant products. There are some big, impressive companies in this realm, including Taiwan Semiconductor (NYSE:TSM) and Petroleo Brasileiro (NYSE:PBR).
You can invest in emerging markets easily via mutual funds. Here are a few you might look into, but there are many others:
|
Fund |
Expense Ratio |
5-year Average Annual Return |
10-year Average Annual Return |
|---|---|---|---|
|
SSgA Emerging Markets (SSEMX) |
1.20% |
14.6% |
10.5% |
|
Lazard Emerging Markets Equity (LZOEX) |
1.53% |
17.3% |
12.6% |
|
T. Rowe Price Emerging Markets (PRMSX) |
1.24% |
15.1% |
11.4% |
|
Vanguard Emerging Markets Stock Index (VEIEX) |
0.32% |
15.4% |
11% |
Data: Morningstar.
Before you jump in, though, do your normal due diligence. Look closely at costs, as high fees can shrink your returns -- and don't expect consistently high returns like the ones we've seen recently. Although emerging markets go through boom and bust years just like any other market, they have strong potential -- and can help make your portfolio truly diversified.
