Should I Buy International Stocks?

Going International

A lot of noise has been made recently about the importance of investing in international markets for greater returns. In fact, the world's greatest investor, Warren Buffett just made a huge international acquisition. Should you be looking as well?

Buy What You Know

The legendary money manger Peter Lynch of Fidelity Magellan Fund fame always preached investing in what you know. He used to do "research" on some companies by talking to his wife and kids about new products or retail chains. He was famous for sitting in malls and watching stores to see which were busy and which weren't. This all fit into his strategy of using more than the financial news and crunching numbers to find the "next big thing" before anyone else. If he didn't fully understand the business from top to bottom (beyond just the numbers) he wouldn't buy.

The same should be true for your investment portfolio. You need to be invested in businesses that you understand. You need to have your money in companies that you can see and touch. If you don't know how the company makes money (remember Enron?) and what outside forces affect a company's earnings, you really shouldn't trust your money with them.

Going Abroad

The problem with international investing is that many companies overseas don't have a presence in the US yet. This makes it difficult to fully evaluate their true business prospects. Still, people are flooding markets in India, China and other markets with hopes of higher returns. Almost two thirds of mutual fund deposits last year went to international funds. This makes sense because many international markets have fast growing economies and have huge populations. People are seeking the potential for great returns.

The problem is that there are a lot of forces beyond your control or understanding outside the US. The Chinese government is just starting to come around to the idea of capitalism. Russia is moving away from political freedoms and back to more government control of the economy. When a free market does not exist, growth is hindered. The list goes on and on.

If you are going to invest in individual international companies, they should be ones that you have personal experience with or know very well. We think that the overall growth will be strong internationally but the overall risk will be high as well.

I Really Want International Exposure.. What Do I Do?

We believe the safest and most cost effective way to have some exposure to the international markets is through two Exchange Traded Funds. The first is the iShares MSCI Emerging Markets Index Fund EEM. As the name suggests, this is a fund designed to track the performance of the MSCI Emerging Market Index. You get a passively managed basket of stocks that give you exposure to smaller, faster growing, emerging markets. The expense ratio is .77% and pays around 1% in yield. The turnover is very low at 9% which makes the fund very tax efficient. The shares have experienced a recent pull back and you now have a great opportunity to buy at a discounted price.

The other ETF to look into is iShares MSCI EAFE Index Fund EFA. This will give you exposure to the rest of the more developed world outside the US. Here, you have exposure to Europe, Australia and the developed countries of the Far East. The Fund has an expense ratio of .36% and a turnover ratio of only 8%. It also pays a nice 1.64% yield which more than covers the expenses. This fund has also seen a recent pull back and might be showing signs of a buying opportunity.

Overall, be careful in international markets. Investing is difficult enough in American markets. EEM and EFA can make great additions to your Core Portfolio for international exposure and diversification. If you want to have some individual international companies for your Trading Portfolio, feel free to speculate. You should fully understand how the company operates before investing. Make sure that you understand the risks involved with owning these companies and understand what makes them a good investment in their respective country.