Investing in International Stocks
In recent month of market turmoil, we've been highlighting ways for investors to diversify their portfolios. We've looked at mutual funds, index funds, bonds, and other assests that average investors need to know about. To continue that series, THAT MONEY SHOW's host and managing editor, Betsy Karetnick, invited John Prestbo, editor of the Dow Jones indexes, to discuss whether or not it's wise to add an international component to your portfolio. The following is an edited version of that interview.
THAT MONEY SHOW: Do you think it's a wise move to add some international flavor to a portfolio?
JOHN PRESTBO: I certainly do. It's a very good way of gaining exposure to the multitude of stocks that aren't in the United States. The U.S. has the world's biggest stock market, but it's only half of the what's out there. I think investors ought to avail themselves of the opportrunities in that other half.
TMS: The U.S. economy might not being doing well -- it's slowing now, as we know -- but another country's economy might be doing very well?
PRESTBO: That's right. It's sort of like the horses on the merry-go-round. When one is up, the other is down, and back and forth they go. That gives the investors a chance to participate in growth elsewhere when at home it might be slowing, as it is now.
TMS: So, how do we go about doing this?
PRESTBO: Well, I think for beginners the best place to start is with baskets of securities, namely mututal funds, or these new exchange-traded funds which are the same idea. You'll get, with one purchase, interest in a portfolio that holds hundreds, if not thousands of stocks. And I think that brings the kind of diversification that will minimize a lot of the volatility that might happen with some overseas investments.
TMS: Some foreign companies actually do trade here under something called American Depository Receipts (ADRs). They're like stock certificates, but not exactly. You can buy that way if you want a specific company. Is that a good idea?
PRESTBO: That's correct. But you shouldn't buy those any more than you would any other stock without doing your homework. You should research the prospects of the company just as thoroughly as you would of any United States company. And sometimes it's a little bit more difficult to get the kind information from overseas companies that you are used to getting from domestic ones.
TMS: How do we go about getting some of that information? European companies may be a lot easier to research than those of a third world country.
PRESTBO: In terms of availability of information, Europe comes next after the United States. Asia brings up the rear, if not completely behind on the information front. But a lot of emerging countries do not have the kind of disclosure rules that U.S. investors are used to, so you'll have to do a lot of Web surfing, and you'll probably need a broker if you're going to buy individual stocks overseas.
TMS: What about risk?
PRESTBO: Well, certainly there's a lot of risk in currency. Because you're buying stocks in other currencies, when you bring the results back home, you have to translate it into U.S. dollars. When the dollar is strong, like it is now, those overseas profits don't add up to as many dollars as when the dollar is weak. So when you bring home profits from overseas investments when the dollars is weak, you get more dollars. Right now the dollar is strong -- good for travelers going overseas, but not so good for investors. However, the dollar has been strong for a while now, and a lot of professionals I've talked to think that pretty soon the dollar will start to weaken and that will be good for investors.
TMS: Which markets in particular right now are doing well?
PRESTBO: Mexico, for example, is up 18% so far this year. Other parts of Latin America are not doing so well and, of couse, Japan is not doing very well either. But many coutries in Europe, while slowing down, are nonetheless, not performing as badly as the United States. The tech wreck didn't spread as deeply over there.
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