Parental Discretion is Advised

Bill Byrnes — Mon, 21 May 2007 12:26:00 -0500

International mutual funds should be a part of every investor’s portfolio. I’ve beaten this drum before (see A Euro, A Yen, a Buck or a Pound and The CIA Guide to International Investing). But when the cover of BusinessWeek asks: What’s the Most Extreme Emerging Market on Earth? (remember the Sports Illustrated curse) I begin to get a little nervous. Let’s stick with China for a minute. The Hang Seng (Hong Kong stock market) is up 30% in the past year. This is against a current back drop of Chinese government concerns about their stock markets becoming too speculative, widening the trading range of the Yuan, and possible U.S. trade limitations.

International markets will go down at some point in time and I take the above as warning signs that a correction might occur sooner rather then later. Does this mean you should sell your international mutual funds or not buy, if you don’t yet own any? No. What it does mean is – don’t get carried away. Markets that have risen the most are most likely to correct the most AND markets of “newer economies,” i.e., riskier economies/counties, will be more volatile then the markets of mature economies.

I (being very American) lump the world’s economies into four categories (with representative examples):

1. Mature - Germany, Japan.

2. Big New - China, India.

3. Emerging - Vietnam, Egypt.

4. All Others.

I’ll leave it to you to fill in the rest of the counties in each category (maybe you can tell me if Russia fits into 2 or 3). Volatility in a nation’s markets increases as the size and maturity of those markets decreases. An analogy is U.S. Big Cap, Mid Cap and Small Cap stock funds. Investing internationally is no different then investing in the U.S. – understand the risk and diversify.

The MUTUALdecision Blog: Parental Discretion is Advised

Parental Discretion is Advised