Bon voyage: investing overseas could take your portfolio on a trip up, up, and away - Money: Personal Finance

Entrepreneur, Jan, 1996 by Lorayne C. Fiorillo

The plane ride to Hong Kong is too long, and you get seasick on anything smaller than the QE2. Even if you don't know who Fodor is and don't care what they're wearing in Paris this season, there are lots of reasons to go abroad this year . . . with your money, that is.

After a record-breaking year for stateside markets, few investors may be tempted to take their portfolios on a foreign trip. Why bother when results have been so good at home?

Here's one reason: A study of world markets between 1970 and 1992 by Chicago research firm Ibbotson Associates concluded that a portfolio investing up to 35 percent in foreign stocks was less risky and earned 1.2 percent more each year than one invested exclusively in U.S. issues. Even though past performance is no guarantee of future returns, consider that the study included some of the finest years in the U.S. market's history.

Better yet, just as the U.S. market may be peaking, foreign markets may be at the beginning of a turnaround. Several ongoing factors should keep foreign pots bubbling: Rapid economic growth, the privatization of formerly state-controlled companies, the spread of democracy and the rise of capitalism, the removal of trade barriers, and the increase in global communication have all helped create big opportunities for investors.

But with any opportunity for profit comes the risk of potential losses. Few investments could rival the spectacular performance of emerging markets in 1993, with total returns up over 67 percent . . . or the sucking sound as emerging markets submerged in 1994 with the collapse of the Mexican peso. Just as a civilized traveler must be ready for anything, an international investor must be prepared to take on a variety of risks.

* Currency risk: If the U.S. dollar rises in value, when profits and dividends are converted back to U.S dollars, your investment returns can be less than expected . . . and a great year can turn into a mediocre one.

* Political and economic risk: Sudden changes in government policies can wreak havoc on the most diversified portfolio. Mexican stocks, once highly profitable, have fallen sharply due to the country's economic woes. Hong Kong, due to come under Chinese rule in 1997, and China itself are other examples of potentially risky situations.

* Risks due to accounting practices: Want to learn more about a U.S. company? Send for an annual report. Want to learn more about a Southeast Asian or Scandinavian company? That's a little trickier. Accounting and reporting procedures can differ from U.S. methods and may be difficult to comprehendueven if you understand the language.

* Market risk: U.S. markets are highly regulated, liquid and efficient, making it easy to judge objectively how much shares are worth. But liquidity (how easily a stock is bought or sold) in individual foreign issues can be a problem, as can trading and accessing price information.

If this sounds like more effort than it's worth, potential rewards may be worth the extra effort. Twenty-five years ago, about two- thirds of the world's equity markets consisted of U.S. stocks. Today, by not investing internationally, you could miss out on seven of 10 of the largest automobile, financial service and insurance companies, and eight out of 10 of the world's largest electrical, chemical, machinery, engineering and utility companies. Markets outside the United States have grown to represent almost two-thirds of world markets.

Investment in foreign stocks certainly diversifies your portfolio, but even better, as your dollars take a run for the border, they provide a stabilizing effect on your portfolio. Since foreign markets don't usually march in lock step with domestic markets, when one zigs, the other may zag. In the first 11 months of 1993, for example, the Morgan Stanley Europe, Australia, Far East (EAFE) stock index rose 24 percent, compared with a gain of just 9 percent for the Standard & Poor's 500 stock index.

So if you're game for adventure, dust off your passport and join us on a tour of foreign investing, from the mundane to the exotic.

The Accidental Investor

Don't look now, but you may already be reaping the rewards of foreign investing. Many large American companies derive more than one-quarter of their earnings from foreign businesses and subsidiaries. In most parts of the world, it's possible to have your letters FedExed overnight, sip a Coke, bite into a Big Mac, and cruise in a Chevrolet. International exposure provides companies with new markets.

As a first foray into foreign markets, investing in multinational corporations provides a foreign excursion . . . without needing a passport. The risk here is similar to that of investing in foreign securities, however: Profits earned in foreign currencies are subject to currency risks, and some profits may get lost in the translation, although fluctuations generally don't affect profits and earnings as dramatically as when you invest in foreign companies.

Europe On $100 A Month

If the idea of investing in foreign markets on your own makes you queasy, consider hiring a tour guide (better known as a mutual fund manager). Many funds invest in overseas markets, but for the beginning traveler, a broad, well-established international portfolio could be a good starting point.