The Overseas Investments You Do Not See

Clients often ask us how much of their money is invested in foreign countries. Usually, they have heard that economies in countries such as China, India, or Brazil are growing faster than the U.S. economy, and they want to make sure that they will participate. Others are more wary because they know that sending money abroad involves additional risks.

Today, about 75% of the world’s economic output and 60% of all stock market value reside outside the U.S., and that’s why every BWFA portfolio includes non-U.S. investments as part of a diversification strategy. But there is a lot more to participating in international markets than is readily apparent.


The part you see

Typically, a BWFA investment model specifies that 20% of an individual account will be held in foreign stocks and bonds. This part is easy to see on a BWFA investment statement. However, given that non-U.S. stocks are 60% of the world’s equity value, this allocation seems small.



The part you do not see

In fact, our clients are more deeply invested overseas, even though it is not reflected on BWFA statements. Here’s how we do it—and why. Many of the large companies we know as American do a substantial portion of their business abroad. In total, as of the end of 2009, goods produced and sold outside of the United States accounted for 47% of all sales by companies in the S&P 500 index. Companies such as Fluor, Johnson & Johnson, and Mylan (each of which are on BWFA’s Buy List) have over 50% of their sales outside of the United States.


By investing in U.S. companies with a major non-U.S. presence, BWFA increases our clients’ exposure to international markets. This avoids direct investment in foreign stock exchanges that are more risky and more expensive. Also, our clients will eventually need to spend their money in U.S. dollars, so it’s better not to shift out of dollars in the first place.

We acknowledge that there are problems in how U.S. financial markets operate, but they are the fairest and most efficient in the world. Fundamentally, foreign stocks tend to be more risky than domestic stocks because:

  • Currency risk. In addition to individual companies and stock markets going up and down, the currency in which the stock is denominated will go up and down.
  • Smaller markets. Most foreign stock markets are much smaller than the U.S. market. For example, Brazil’s stock market is 5% of the size of the U.S. stock market, so it can be adversely affected by outside forces such as U.S. investors.
  • Less regulation. Only a few stock markets in Europe and Asia provide solid government regulation and investor scrutiny.
  • High costs. Most foreign markets just are not as well run as U.S. markets. This is especially true in countries such as Brazil, Russia, India and China, which have shown great potential, but are not for the faint of heart. The good news is that American companies such as NYSE Euronext and the NASDAQ OMX Group, Inc. are exporting U.S. stock market operations to the rest of the world


One more thing to consider. Overseas sales is one of the reasons why U.S. companies have been very profitable despite the deep recession. The ability of U.S. companies to find profits worldwide helps to explain why stock market investors have done reasonably well at a time when many Americans are losing their houses and cannot find jobs.

Contact BWFA to find out more about our international diversification strategy.