Q With all of the turmoil in Greece and Europe, should I be investing in International and global investments?
A I think that the current financial crisis affecting Europe, much like the financial crisis that the United States has experienced the last couple of years, demonstrates that what happens in one part of the world has an impact on other parts of the world.
You hear pundits talking about "contagion." Contagion refers to the effect that one market may have on other markets. Contagion can be very real and the fear of contagion can be the source of uncertainty and fear in all "markets."
Many times the terms International and global are used interchangeably. While similar, these two are not the same. International investing primarily involves investing in foreign companies.
There are several ways that you can access international markets. Investments can be made through mutual funds, exchange traded
funds, American depository receipts, U.S.-traded foreign stocks and stocks traded on a foreign exchange. Global investing may involve investments in foreign and domestic companies.
The investments are generally in companies that conduct business on the world "stage." Their business models expand beyond their home borders.
It is interesting to note that in 1970 U.S. publicly traded equities represented 66 percent of the world market capitalization. In 2008 U.S. equities represented 45 percent of the world market capitalization vs. 55 percent for the rest of the world (source MSCI Blue Book). We are truly becoming a more global and interconnected economy.
These interconnections can have other effects when it comes to your investment portfolio. International type investments have been used to reduce correlations between investments. Correlation is the tendency for investments to move in tandem.
As we become more connected I suspect that the correlations might stay high. This would mean that foreign and domestic investments will tend to go up and down together. However, by reaching beyond the U.S. borders you may still obtain additional diversification benefits.
Diversification does not guarantee against market loss or ensure market gains. They are techniques to help manage investment risk. Different countries have different strengths and weaknesses. International and global investing enables you to take advantage of what the "world has to offer."
When looking at international investments you might consider developed economies and developing economies. Developed economies are those of Japan, the United Kingdom, France, Australia, Germany and others.
Emerging markets might include countries such as Brazil, Russia, China and South Korea. Just remember that international investing has special risks such as changing currency exchange rates, different government structures and regulations, and other risks.
I would recommend that you review your risk tolerance and the time horizon and goals for your portfolio. We will probably continue to experience volatility until some clarity is established for these economies and the effect that the recessxion will have on the world's economy.
From a long-term perspective, I feel that allocating a portion of the equity or risk portfolio to international investments makes good sense. You should review with your financial adviser the investment vehicles and how they might fit into your plan.
Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Greg Epps is a registered representative and Certified Financial Planner with Epps Financial Partners. Submit questions to his attention by writing to Business Editor John Vass Jr., Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by e-mailing him at jvass@timesfreepress.com.