For International Diversification, It's All a Question of Timing

As in everything in life there are always pros and cons. Investors in the BRICs ( Brazil-Russia-India-China) are sitting with huge open trade profits. One can easily look at the enhanced return one would have received this year if they had purchased virtually anything that was based in the Euro currency. They would have earned for themselves an additional 12% just because of the currency. Not bad huh!

But what would have happened if the U.S. dollar, that everyone seems to hate from beautiful models to rappers and other Harvard graduates, does something that no one expects … it strengthens??? As a long time investor as well as a contrarian, I believe anything can happen. I prepare for that, and I know that in most cases the crowd is wrong. It seems that many investors have let the weak dollar dictate their investment strategy. Depending on the country, currency or the timing, risks can amplify as opposed to being diminished. One needs to be aware that currency risk can erode returns as well. A very important fact is: It is very hard to hedge currency risk.

Many international markets have produced higher average returns granted, but also with much higher volatility. One example is Templeton Russia & East European Fund (TRF). The Templeton Russia Fund went from approx $12 in 1996 to a high of $65 in mid 1997, then crashed back down to below $10 in October of 1998 with the Russian debt crisis and emerging market meltdown. Wouldn’t it have been nice to purchase somewhere near the lows with diminished risk?

What transpired in Russia is common to many emerging markets: high returns, high volatility. My suggestion is that instead of trying to chase returns, as so many have done with the BRICs (Brazil-Russia-India-China), I would wait until there is a correction. Wait to buy value. Your risk will be vastly diminished and your returns potentially greatly enhanced. Market history is full of past situations where the patient investor has made tremendous returns.

One can look at Korea. From the lows in 2001, one could have made 7 times their money, or from TRF (Templeton Russia Fund) almost 10 times. My perspective is to be a value investor (as well as, at times, a trader). In this fashion, one mitigates the risks and opens oneself up for extra-ordinary returns. Historically, too many times, emerging markets haven risen parabolically and then crashed back down destroying accounts.

Another thought one might consider in regard to international investing is the fact that many U.S. companies such as McDonald's (MCD), Procter & Gamble (PG), Nike (NKE), General Electric (GE), Altria (MO) and many more have exposure to both emerging markets and mature markets. They can fill the niche of international investments. As well, for better or worse, they are denominated in U.S. dollars which gives stability. Though, again, from a value investor's viewpoint, many of the U.S. consumer conglomerates are not at Warren Buffet type of prices. Have a plan and do not chase high risk ideas.

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