Financial advisors often find international investing tough to sell as a concept. Years ago, I was having lunch with a client couple on the day of their annual portfolio review. In the spirit of diversification, I suggested we expand beyond our shores and add international stocks to their account. I remember their response event today: “International investing? Don’t you realize they are having trouble over there?” The world beyond US shores was summed up as “over there!” How can you make the case for this aspect of diversification?
How big is the market?
Broadly speaking, US equities account for about half of global capitalization. If we limit ourselves to US stocks, we are ignoring the other 50% of potential investment opportunities.
Diversification is easier now.
Decades ago, buying the national telephone company of another country was considered a proxy for their stock market. Today, there are ETFs, mutual funds and separately managed accounts representing different countries or combinations of countries. There is often active portfolio management.
Research analysts on the ground.
If you work at a large financial services firm, they likely have analysts, offices and branches around the globe. These analysts are meeting with company management, doing site visits and keeping their ears to the ground.
Global vs. International.
If a client is still hesitant about investing overseas, global might be a better concept. If a manager runs a global fund, this often means they can buy equities both in the US and overseas. This can be a “toe in the water” for the client, a way for them to get comfortable.
Familiar names.
They might be hesitant to “buy overseas stocks” while loving the products they produce. If you look at international stocks your firm likes, there are likely some that have world famous brands. This can be an east first step into international investing.
Different stock market cycles.
It might be said “If the US stock market sneezes, world markets catch a cold.” In practice, different world markets are in different stages of their stock market cycle. Put another way, there is usually a stock market rally taking place somewhere in the world.
International investing can include bonds too.
This is an area where you want professional management. Interest rates can be higher or lower in other countries. You also need to take currency conversion into account. A weak dollar means earnings in some other foreign currency get a boost and vice versa. Leave this to the managers.
Do they travel overseas?
The couple who said “They are having problems over there” might not leave our country that much. If you have clients who vacation overseas, they might have favorite countries they love. They might be open to participating in their stock market too, through a managed fund. This might also work if they are proud of their heritage.
There are ways of making a commonsense case for international diversification. How much does your firm recommend your clients have invested in offshore equities?
