Tune out the global hype
You should invest internationally, but not because your adviser just fell in love with overseas funds.
(Money Magazine) -- At the financial adviser conferences I've attended lately, international investing has been the craze. It's what speakers are touting and exhibitors are pitching. And it's easy to see why: Everybody loves a winner.
A few years ago, when I recommended that clients keep a third of their stock investments in foreign shares, the typical response was "I can't go that high - that's too risky." They resisted because of a trait known as familiarity bias; you're more inclined to invest close to home because it seems safer.
But after five years of outrageously good returns in overseas markets - from 2003 through 2007, international stocks rose 168% vs. 82% for U.S. stocks - that resistance is gone. When I make the same recommendation today, most clients say "Why only a third?" Familiarity bias has been beaten back by another trait: a desire to get behind a winner.
As always, you can depend on many financial advisers to take advantage of your change of heart and push the hottest performers of late. After all, it's simple to sell you something you're already inclined to buy. Unfortunately, it's for all the wrong reasons.
If you're loading up on foreign stocks now, you're buying near the top of the market. And if your adviser is pushing you into international stocks because of how well they've done, you can be sure he's guilty of performance chas
I still believe you should keep about a third of your equity portfolio in international stocks, but not because they are hot today. Don't invest overseas because you think your adviser has a clue about which markets are going to do better in the coming years.
Do it because we live in a global economy - international markets make up about 55% of the total value of world markets. You don't get enough foreign exposure by buying U.S. multinationals, as evidenced by the large gap between U.S. and international returns. Still, we are going to spend more of our money in dollars than in euros or yen, so a third seems like a big enough stake to me.
Here and abroad, expenses matter. Buy international stocks through a low-cost index fund or an ETF.
Don't bet on individual countries or regions. Think of hot investments as being like frying pans: Grab them while they're still hot and you'll get burned.
The Mole is a certified financial planner and certified public accountant who - in the interest of fairness - thinks you should know what goes on behind the scenes in financial planning. Want to make contact? E-mail firstname.lastname@example.org.Send feedback to Money Magazine