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Ignore these lies about investing abroad

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For many people, there’s no place like home. But if that’s how you feel about your money, you’re doomed to a financial life of sub-par returns.

It’s natural to want to invest at home. If you live in Singapore, for example, you see the Straits Times Index quoted every night on the news. You drive by the DBS building every day. If you’re based in Hong Kong, you’re used to watching the Hang Seng Index. And if you’re American, U.S. markets are probably your first investment stop.

But thinking that investing at home is safer is a dangerous investing myth. If you’re only investing at home you’re putting your portfolio at risk… and more often than not, you’re missing out on big gains.

That’s why we believe everyone should have some international exposure in their portfolio. So today, we’re debunking three of the biggest myths about international investing…

Myth #1: “Stocks are too expensive in other markets”

Stock markets around the world have been rising over the last decade…

For example, the MSCI All Country World Index (which reflects the performance of global stock markets) is up 201 percent since global market lows in March 2009. The S&P 500 is up 303 percent over the same timeframe. And now, by many measures, U.S. equities are overvalued.

So you’d be forgiven for thinking that stocks around the world are expensive.

But there are lots of markets that are still cheap…

One of the best ways of measuring market value is to use the cyclically-adjusted price-to-earnings (CAPE) ratio. It’s a longer-term, inflation-adjusted measure that smooths out short-term earnings and cycle volatilities to give a more comprehensive, and accurate, measure of market value.

As you can see in the chart below, it’s true that stocks are expensive in the U.S., Denmark, Ireland and other markets based on CAPE.

But there are plenty of cheap markets too. The below chart shows the 10 cheapest markets by CAPE ratio.

Russia, the Czech Republic, Turkey and Poland are considered the cheapest countries based on CAPE. So there’s still value out there.

Myth #2: “I don’t hold enough shares in my home market”

As I said earlier, people invest mostly in their home market. This is called “home country bias” and it refers to the tendency of investors to have a portfolio weighting bias in favour of their local market. And as we’ve written before, investing in what you know – which is generally what you see around you – is generally smart.

For example, as shown in the graph below, the average American with a stock portfolio has 79 percent of her money in U.S.-listed stocks. Investors in Japan put about 56 percent of their money in Japan-listed stocks. People in Australia have around two-thirds of their portfolio in local shares.

That might be what they’re comfortable with. But from a portfolio diversification perspective, it’s like juggling live dynamite.

As the graph below shows, American stocks account for only 53 percent of total global market capitalisation (that is, the value of all stock markets in the world). So American investors are a lot more exposed to U.S.-listed companies than – based on a breakdown of the world’s markets – they should be. Japanese investors are even more lopsided in their home preference – Japan accounts for only 8 percent of the world’s stock market, yet they invest 56 percent of their money at “home”. And Australians put 64 percent of their money into their own market – which is just two percent of the world’s markets.

Why is this a problem?

Home country bias can put investors’ portfolios at risk if their local economy suffers a downturn.

If all of your assets are in American stocks, bonds and dollars, what happens if the banking sector goes bust… the dollar massively devalues… the real estate market crashes… or the government starts searching for ways to plug a massive budget deficit, to the detriment of your retirement portfolio? Your U.S. assets are just cherries for the picking.

So one of the best ways to protect yourself against a domestic downturn – or worse – is to have some exposure to foreign stocks.

Myth #3: “Other markets are lousy performers”

Many investors think big, developed markets like the U.S., Europe and Hong Kong tend to perform the best. But if you’re only investing in markets like this, you’re missing out on big gains.

Just take a look at this chart…

As you can see, in 2017, the S&P 500 was up 21.3 percent. The Singapore Straits Times Index returned 31.9 percent. And the MSCI World was up 24.6 percent. But other markets did done a lot better… like the 55.6 percent return from the MSCI China Index or the 43.1 percent return from the MSCI Asia ex Japan Index.

My point is that diversification is critical… you might do well for a while with being overweight in your home market, but over the long term you’ll perform better (and catch the outperformers) by diversifying.

Good investing,


Kim Iskyan
Publisher, Stansberry Churchouse Research

About Kim Iskyan

Kim Iskyan has nearly 25 years of experience as a stock analyst, hedge fund manager, political risk consultant, and financial commentator in more than half a dozen emerging and frontier markets.

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Rebalancing: A simple, if unappreciated, way to enhance investing

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The bull market in stocks has been running for nearly eight and a half years — one of the longest upward stretches ever. Have you rebalanced your portfolio lately?

You might want to think about rebalancing to lower your risk and possibly improve performance. This buy-low, sell-high approach can help you stick to a plan and overcome harmful psychological tendencies.

Yes, psychological. Rebalancing can be an effective way to deal with greed, fear and indecision.

“Consistent rebalancing is a reliable, and often underappreciated, source of higher risk-adjusted performance for the patient investor,” wrote Brent Leadbetter and two colleagues at investment firm Research Affiliates in a recent report.

It can help investors overcome the natural tendency to wait and see before tweaking their investment mix.

How rebalancing works

It’s a fairly simple concept: With rebalancing, you occasionally want to cash in some profits on high-flying stocks or other assets, then reinvest the proceeds in laggards. The idea is to bring your overall portfolio back in line with a suitable long-term mix that’s suitable for you. Rebalancing assumes you have a target mix of stocks, bonds, cash and other investments and want to stick with it.

Suppose you earlier decided that a split of 60 percent stocks/stock funds and 40 percent bonds/bond funds is a good mix. If you’re currently sitting at 65 percent/35 percent, for example, you might want to pull assets equal to five percentage points from stocks and reinvest them in bonds, to get back to that 60/40 position.

Stock prices have tripled since the long bull market began in March 2009. Consequently, you might have a bit too much in stocks, especially as you’re older now and presumably want a less-volatile portfolio.

“The biggest advantage of rebalancing is that it helps you manage risk,” said David Fernandez, a certified financial planner at Wealth Engineering in Scottsdale. “The U.S. stock market has done so well lately that, if you’re not rebalancing, you’ll wind up with a portfolio that’s heavily concentrated in (large) U.S. stocks.”

Behavioral issues

A less-obvious aspect to rebalancing is that it can help investors overcome psychological tendencies that can prove harmful.

Greed is one. As explained by the Research Affiliates report, when investors are sitting on large paper profits in the stock market, they could become susceptible to the “house money” effect. This explains the tendency of casino gamblers on a winning streak to stay too long at the table. So too with many stock-market investors.

Fear of missing out is another. Many of us tend to remain heavily invested in stocks even when it becomes more risky to do so, out of fear that our friends will keep bragging about all the money they’re making if the market keeps rising.

People are “evolutionary wired to follow the herd,” said the Research Affiliates report. That is, nobody wants to feel stupid, or even ostracized, by missing out on big gains.

These behaviors are easier to overcome if we stick to a plan. Rebalancing provides a discipline for taking such actions even when they don’t feel right.

Conversely, rebalancing also provides the justification for keeping at least a toehold in the stock market at all times. It can help you view bear markets not as cycles to be feared but as buying opportunities.

Betting on long-term averages

Still, it can be difficult emotionally to take some chips off the table during a market environment like that of the past eight-plus years, when the gains have rolled in fairly steadily. There’s a natural tendency not to want to sell winners prematurely.

However, rebalancing isn’t the same as market timing, which involves making big shifts into or out of the stock market, usually based on recent trading patterns, valuations or other news or developments. With rebalancing, the changes are more subtle, and they’re focused on getting back to a predetermined allocation or mix.

Rebalancing also involves moving among different investment subcategories. Foreign markets haven’t fared nearly as well as U.S. stocks in recent years and thus could be a good place to move some money, Fernandez noted.

Rebalancing rests on another assumption — that investment returns will tend to fluctuate more or less in line with their long-term averages. This is the concept of “reverting to the mean.” While individual stock prices can fluctuate wildly, the market as a whole has returned about 11 percent annually over time. After a big rally, stocks tend to cool off for a while. After a slump, they tend to recover. 

“A disciplined rebalancing approach continually positions our portfolios to reduce risk,” said Research Affiliates.

In fact, investors who rebalance don’t necessarily give up all that much in gains, even when the market is advancing. For example, the all-stock Standard & Poor’s 500 index generated an average gain of 7.2 percent annually over the 20 years through 2017, noted JPMorgan Asset Management. A 60 percent/40 percent stock-bond split didn’t do all that much worse, returning 6.4 percent a year, but with less risk.

Tips for success

Rebalancing is a simple concept, but there are ways to make it more effective. Here are some tips on that:

  • Rebalancing works best inside Individual Retirement Accounts, 401(k) plans and other accounts where buy/sell decisions don’t trigger taxable gains or losses. If rebalancing would exert a tax impact or result in big trading costs, you might want to rebalance less frequently.
  • You don’t need to rebalance all that often. Many advisers suggest doing so about once a year or after your portfolio has drifted out of whack by maybe five percentage points.
  • Rather than selling assets to rebalance, an alternative would be to earmark new investment dollars or reinvested dividends into stocks or bonds that have lagged.
  • Rebalancing doesn’t work as well with individual stocks or bonds, which conceivably could lose all their value. You want to use broadly diversified funds.

As noted, the flip side to rebalancing is that it can slow your gains during periods of sustained rising prices. But after more than eight years of a mostly upward trend, the odds are increasing for a major, downward shift in direction.

Reach the reporter at russ.wiles@arizonarepublic.com or 602-444-8616.

READ MORE:

  • Don’t know what to do with your 401(k) plan? Consider moving it to an IRA
  • Here’s what economic growth means for your investments
  • Keys to better investing may be hiding in your tax return

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'Am I on a suckers' list after investing £1862 in carbon credits?'

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  1. ‘Am I on a suckers’ list after investing £1862 in carbon credits?’  Telegraph.co.uk
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Investing: It's not that difficult to get the big things right

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  1. Investing: It’s not that difficult to get the big things right  The Guardian
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