The level of exposure to international stocks is an important issue for investors. One of our featured sites, Abnormal Returns, has a thoughtful analysis of this question. A.R. writes:
The question is whether this surge in international investment is simply a means of catching up to the commonly recommended 20-40% equity allocation. Or is it simply another case in the long line of individual investors chasing hot performance? We will not know the answer to that question until we have a notable market break, but until then there are plenty of issues to deal with on the international investing front.
Read the entire article, a thoughtful consideration that includes evidence from several sources. There is an interesting question for individual investors: Can you use ETF approaches to hedge your inherent exposure to world conditions? It is innovative and interesting.
Our observations are just opinions -- conclusions based upon experience without our normal collection of data specific to this question. This is the kind of topic that we have on the writing agenda for further research, but the question is so timely that we cannot resist a preliminary comment.
1. Is this performance chasing or a thoughtful rebalancing of assets? We vote for the former! Chasing performance is one of the big mistakes of the individual investor, and many financial consultants wind up doing the same thing. Financial advisors, even though they know better, are forced into taking positions like this to show they are "with it" and match performance.
2. Is there transparency? We say "No!" ETF's are opaque, not transparent. The investor delights in not having to think about individual stocks. Investors are encouraged to trade on "feel." They just want to get some exposure to BRIC.
3. Investors have no real knowledge of the countries or industries in which they are investing. We know that more people in the U.S. can name the Three Stooges than can name the three branches of government. They know who is leading on American Idol, but can't name their own Senator. Investors do not know the leaders, population, rate of economic growth, or political issues facing the countries in which they invest, must less information about the companies in the ETF.
4. Accounting issues. Financial accounting in the U.S. is at a different standard from that of other countries. What do we really know about these companies?
Our strategy has been to invest in U.S. companies like Caterpillar, Inc. (NYSE:CAT) where there is as much as 50% foreign exposure, and accounting that we can trust. So far, this has not worked as well as buying the ETF's. Only recently has the market begun to realize the strength of the multi-nationals with foreign sales.
Thanks again to Abnormal Returns for an excellent insight on an important question. Our reactions are more of a research agenda than a conclusion, so comments are especially welcome.