Market Beat: Investing in foreign countries
Diversification is one of the best risk management tools that investors have at their disposal. Remember, “don’t put all your eggs into one basket.” If you drop the basket, the eggs could break.
One way to add some diversification to your portfolio is by using foreign stocks. There are two broad categories of foreign stocks, emerging markets and foreign developed. One method to have foreign exposure is to use broad-based, low-cost index funds that consist of emerging markets and developed markets.
Another approach is to use exchange traded funds that represent specific countries and focus on some of the countries that you prefer. Since I’m writing this article from a beachfront condominium in Loreto, Mexico, I’d thought I’d write about Mexico. Loreto is a very popular destination for Americans. In fact, I’ve had quite a few friends from Truckee over the years that have retired and moved here to lower their cost of living and enjoy their retirement years. Between 2000 and 2010 about 750,000 Americans moved to Mexico as full-time residents.
The exchange traded fund that represents Mexico is EWW. Year to date as of April 8, EWW has posted a gain of 11.80%. Over the last 10 years, it has averaged 5.95% per year.
Mexico has an interesting economy, which consists largely of exports and a GDP or gross domestic product of over $2 trillion. The United States is Mexico’s primary trading partner and Mexico is the 12th largest exporter in the world. Manufactured products are the primary export in addition to silver, fruits, vegetables, coffee and cotton. Mexico exports just about as much as the rest of Latin America combined and produces about 3 million barrels of oil per day, making it one of the top 10 oil producers in the world.
Investing in foreign stocks can help reduce risk by getting further diversification, but there are also different types of risks associated with foreign investments. One is currency risk and that is the risk of the foreign currency dropping relative to the U.S. dollar. Another is geo-political risk; some countries are more politically stable than others. In the current political environment, there will likely be more discussions of tariffs and our trade with Mexico, but these types of negotiations typically get resolved over time and the long-term outlook is still positive although we may see slowing of economic growth in the near term.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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