Market observers are chastising investors now, for not following advice given two years ago, and for good reason. Jeremy Siegel, professor of finance and the Wharton School of the University of Pennsylvania, advised investors two years ago that they should place forty percent of their stock funds, in foreign shares. At that time, that was more than twice the amount than what the average investor owned. Siegel is known for his stock predictions in the year 2000, having called the bull market top fairly accurately.
Now, market observers are saying, that if investors had taken his “sage” advice, and for example, traded in an index fund for tracking the S&P 500, instead for one that focuses mainly on global markets, such as Vanguard’s Total International Stock Index Fund, the investors’ gains would have increased more their twice their previous amount. Or even if the investors had tried stretching it just a bit more, they say, and bought into an index fund that follows emerging markets, Vanguard’s Emerging Markets Index for instance, investors would have beaten the S&P by four times over, close to doubling the gains that investors had already earned, from investing in the index focusing on international markets.
However, even if investors didn’t have the gall to try to invest then, there is still some time to give it a shot, if any of them have come around to realizing their mistake. The slow, but sure decline of the value of the U.S. dollar has been an obvious reason for investors to start buying into foreign stocks, generally because they are denominated in other currencies. For instance, the value of the U.S. dollar has fallen down by almost fifteen percent, just over the last two years, and by almost a third since the year 2003. The majority of investors, including George Soros, and Warren Buffett, have predicted that the dollar will stay consistently weak for a long time, if not starting to slide back down again. Mainly because, they’re speculating, that the already enormous debt of the nation, $8.9 trillion, just gets higher and higher, with over a billion dollars added to that amount per day. At least in the short term arena, investments in foreign stocks come with the included benefit of a built-in currency dividend. However, there are many other reasons for taking the leap, and investing in foreign stocks, and a few are listed below.
Global Economy
The reasons for buying into foreign stocks are not actually just all about and to do with the gradually shrinking value of the U.S. dollar, and more actually to do with the underlying causes behind it’s steady decline. Despite popular belief, the economy in many countries is actually growing significantly, much faster in comparison to the mere three percent annual growth being recorded for the United States. Foreign markets, especially those in China and India, are not just “emerging”, market observers are saying. These markets are quickly joining, and sometimes even overtaking the more developed markets of the rest of the world. The production and consumption of these markets are rushing forward, and leaving some behind, and as a result, their populations become higher, but more prosperous as well.
As for the rest of the more developed international markets, during all the rest of the growth for smaller companies, they aren’t declining at all; instead the mainstream economies in Europe and Japan are prospering more than they have in a number of years. Observers say that the biggest corporate factors are Japan’s Toyota, and Spain’s Telefónica, are taking bigger shares from the world’s markets. Most observers aren’t surprised that currently, for the first time ever, the total value of the European stock market has recently overtaken the markets of the United States, those of which now, supposedly, only stand for about a third of the global equities, a figure ranging around $51 trillion. Ten years ago, that share was quite a bit higher; currently, it’s down by 46 percent.
Not Enough Oversea Investments Being Made By American Investors
The reason for this, expert economists are saying, is that there is just a general fear and wariness of the unknown. This kind of unwarranted caution keeps two third of Americans in general, further speculate these economists, from even traveling abroad; although lack of financial ability seems more likely the case. Also, the tendency of an investor to keep an unequal share of his or her investments at home, is known as the “equity home bias,” and is stemmed from many various other lengthy, and just as irrational fears. For example, foreign governments with hostile intentions may snatch up the assets of a smaller corporation or company, which Venezuela actually did previously, but at the same time, the companies that are most affected by this are within the United States, or at least based there, not in other countries. American investors are also prone to the line of thought that accounting, and legal standards in foreign markets are below the standards of those in the U.S. market. Despite that it was the system here in America that produced all the Enron and WorldCom fun. Investors here also may get anxious over how hard it is, or may be for them to come by information about foreign finances, despite the fact that the Financial Times, Reuters, and various other companies have the situation of producing information for skittish investors in America well in-hand.
But, on the other hand, to be at least minimally fair, investors in the United States have begun more actively investing in foreign markets. Or have they? The number has only actually ticked to less than two percent, and this is only annually, from the ear 2000. So how can economists actually be certain that this isn’t just a statistic of new investors entering the market, and spreading there shares to the foreign markets, just as thinly as the current investors? Economists do admit that most of that increase is due to appreciation. In actuality, less than one fifth of the average American investor’s portfolio is invested in foreign shares.