Importance of Investing Internationally

I hope Valentine's Day went well for you and your family. The topic is the importance of diversification by investing in international stocks. At the end is a paragraph titled Inner Peace. The first section is the weekly recap published by Vanguard.


Vanguard

The U.S. economy is showing progress as some risks abate—at least for the moment. A deal in Congress to extend a payroll tax cut and federal unemployment benefits means households won't end up with less cash to spend this year, which some analysts had feared could have caused the recovery to falter. And though the housing market remains deeply troubled, home construction is showing signs of life. For the week ended February 17, the S&P 500 Index rose 1.4% to 1,361 (for a year-to-date total return—including price change plus dividends—of about 8.6%). The yield on the 10-year U.S. Treasury note rose 2 basis points to 2.01% (for a year-to-date increase of 12 basis points).


Importance of Investing Internationally

When building a portfolio that includes mutual funds of stocks it is always a good idea to have a mutual fund that buys stocks in international companies to provide some diversification. During this year, these mutual funds have not done as well as mutual funds that invests in US stocks because of a strong US Dollar. So while a strong US Dollar has been good for the US based stocks it has hurt the return for international based stocks. Given the actions by the federal government and the Federal Reserve this will ultimately change which is the focus of this section.

The primary reason given to purchase this type of mutual fund is that most countries outside of the US and the European Union have a faster growth rate. The primary risk with this type of mutual fund relates to currency fluctuations. An optimum ratio of US stock mutual funds to international stock mutual funds has been studied and a portfolio should have more in US stock mutual funds.

As the value of US Dollar changes relative to other currencies the value of international mutual funds will change while US mutual funds will not be impacted. The relative value of the US Dollar to other currencies is a function of the amount of US Dollars in circulation as well as the perception of the US government as a safe haven.

An example to illustrate the impact of the strength of the US Dollar will be the value of the US Dollar relative to the Canadian Dollar and the change in the Canadian Stock Market. In this example, a Canadian Stock Market Index goes up by 10% during a year. Since we live in the US and our currency is the US Dollar the changes has to be converted.
1) If the value of the US Dollar to the Canadian Dollar does not change during the year then the investment should go up by about 10% in your account.
2) If the US Dollar to the Canadian Dollar gets stronger by about 10% then the investment should not change in your account.
3) If the US Dollar to the Canadian Dollar gets weaker by about 10% then the investment should go up by about 20% in your account.

As our national debt climbs by about $1 Trillion each year this means that we are printing $1 Trillion more US Dollars each year. This trend looks to continue for awhile. The question is do investors want to buy more and more of this additional money each year? If they do then the US Dollar strengthens and if they do not then the US Dollar weakens. So right now, investors view the US as a safe haven and the US Dollar is strengthening.

In the future, when our debt level reaches that of European Union countries the US Dollar will weaken. When this happens owning this type of mutual fund will be very, very important. The question is not if it will happen but when will it happen?


Inner Peace

If you can start the day without caffeine - if you can al-ways be cheerful, ignoring aches and pains - if you can resist complaining and boring people with your troubles - if you can eat the same food every day and be grateful for it - if you can understand when your loved ones are too busy to give you any time - if you can take criticism and blame without resentment - if you can conquer tension without medical help - if you can relax without alcohol - if you can sleep without the aid of drugs - then you are probably -the family dog!