Thursday, November 1, 2007

For Golden Years: Stick with Proper Portfolio Diversification

In the current environment where the gains in foreign markets have outsized the U.S. indexes over the past few years, there are an increasing number of articles focusing on the benefits of investing overseas. Urged on by many international funds, the financial media has been hyping American investors to greatly increase their exposure to foreign markets, sometimes to the point of recklessness.

It is important that investors adhere to standard diversification strategies to ensure long term success. Greatly increasing your exposure to foreign markets now simply because they have had a good run is not prudent; remember past performance in no guarantee of future performance. Investors should keep in mind that international markets, especially emerging markets, are extremely volatile. They are just as likely to go down 50% per year as up 50% per year. The trend of the falling dollar which has ignited international gains can reverse at any given moment, backing up like a bowling ball to mow down your overseas investment returns.

Keep in mind that your retirement is funded in U.S, dollars; this usually implies that your exposure to dollars should significantly exceed the percentage capitalization that the domestic markets represent. Merely matching your domestic portfolio allocation to the 50% capitalization represented by U.S. equity markets is not sufficient. Especially in view that many of the foreign markets representing the bulk of the world capitalization lack the regulative oversight and adequate disclosure of the American stock markets.

Increasing your exposure to international investments now is really a form of market timing, something most financial advisors urge you to avoid. It makes more sense to stick to a long-term properly diversified portfolio that aligns with your age and risk tolerance.

One example of an article pushing investors to greatly increase their foreign exposure is this recent gem from Forbes:

For Golden Years, Invest Abroad,-Invest-Abroad?mod=retirement-IRA