Why Foreign Investing Should Be Labor-Intensive

Jun.29.09 | About: iShares MSCI (EFA)

We have a fenced-in pen off of our deck for the dogs to have a little bit of room to explore and play. A couple of weeks ago our two smallest dogs got out after something (maybe a squirrel?) dug a small hole in from the outside of the pen. The two dogs were only gone for a few minutes but it was very scary for a little bit. We had lined most of the pen with rocks of varying sizes but it was not perfect.

So Sunday morning Joellyn and I embarked on a masonry project where we made up some concrete, moved rocks and then reset the rocks in the concrete while trying to work the little bit of chicken wire that runs along the bottom of the fence into the concrete. What does this have to do with investing, you may ask?

On Sunday a reader left a comment in response to my writing about owning foreign equities, asking "doesn't it depend on what foreign equities you own?" Well, yes, it does.

The work in the pen required heavy lifting of many bags of concrete and adding more heavy rocks to the fencing. The idea of gravitating toward more foreign exposure more narrowly than just owning iShares MSCI EAFE Index Fund (NYSEARCA:EFA) requires a different type of heavy lifting. As a quick note: EFA blends away a lot of attributes of the smaller, healthier countries, provides a lot of exposure to Japan and big Western Europe countries, and tends to correlate much closer to the US market than many single-country funds.

The concrete needed to be mixed, the rocks that were already there needed to be moved, more rocks, where needed, had to be hauled in from elsewhere on our property, everything needed to be set, and then everything needed to be properly cleaned up; there were no short cuts.

If you believe your portfolio needs to become progressively more foreign, then you need to learn the dynamics of many other foreign countries, figure the role that these countries can play in your portfolio, figure out how to access those countries, and then follow those countries effectively; there can be no short cuts.

I realize there are time considerations, that people in general just may not want to devote this much energy to it, and of course I may be wrong about the need for more foreign - but this is how I see it. Of course there will be the hard core (or maybe not so hard core) passive investors who say this is just speculation and not investing.

Click to enlarge
I doubt I will change anyone's mind on this subject if I have not already done so, but for a similar view from a different voice check out this week's Connie Mack show, specifically the segment with Andrew Lo from MIT and a half-dozen other places. The simplistic takeaway from the interview is that things like buy and hold and using broad based index funds are not wrong, but they need updating.

This may be a tie-in with my views about markets and investing evolving. I have been writing about this as long as I have been writing. Overreliance on well, it's always worked before is a bad idea. The status quo might be comfortable, but are you willing to bet your future that it will be correct?

The picture is from the fence's earliest days.