|  Michael Molinski is president of Investing Across Borders, a financial media company dedicated to global investing. He is a former International Editor at CBS MarketWatch and a veteran foreign correspondent from Bloomberg News. He holds an MBA from Columbia University in New York and was a recipient of the prestigious Knight-Bagehot fellowship for business journalists . Books Investing in Latin America , Bloomberg Press, 2000 Global investing and the small investor advantage -
Diversify. This is the golden rule of global investing. Diversification is why you're going global in the first place. But it doesn't stop there. Putting half your portfolio outside your home country doesn't necessarily mean you're sufficiently diversified. It's important to split up your investments between different regions of the world, between developed countries and emerging markets, between different asset types, industries and investment styles. -
Pay attention to correlation. This follows from Rule #1, but it's important enough to emphasize . Avoid investing in countries whose stock markets are closely correlated with each other. Look for stocks in countries that have low correlation coefficients (R-squared) relative to the market of your home country ( assuming most of your portfolio is invested in your home country). -
Don't ignore risk. Risk can be measured and quantified , either by looking at volatility (standard deviation), relative volatility (beta) or risk-return measures such as the Sharpe Ratio. Get to know these terms. Even if you don't fully understand them, you can use them to compare potential investments. Understanding risk is especially important when investing outside your home country. Find out what risks your investments are subject to such as currency risk, political risk, or regulatory risk, and weigh them against the stock's potential returns. -
Never forget why you picked a stock. In today's volatile investing world, it's easy to get caught up in rallies or get spooked in bear markets. But when you're faced with the decision of whether or not to sell a stock, the most important question to ask yourself is, 'Why did I pick it in the first place?' Do the reasons still hold water? If not, dump it! -
Don't use currency hedges . It's a natural assumption that when one invests in a country whose currency is prone to devaluation, you should consider buying currency futures or hedging your investments in similar ways. In most cases, though, that assumption is wrong. Your global investments are, in and of themselves , hedges against a downturn in your home country's stock market and against the stability of your home-country currency. Besides, currency hedges are expensive and require constant monitoring and frequent transactions. Your time and money are better spent elsewhere. -
Look under rocks. One of the principal reasons for investing abroad is that markets in less-developed countries are less efficient. It's easier to find stocks whose prices may not reflect all the information that is out there about that company. Perhaps the investor who most personifies this rule is Templeton's Mark Mobius, who has spent his life digging up bargains in the far corners of the globe. We don't all have his travel budget, but we can spend time combing the web for bargains. -
Do your homework. The internet has made it possible for an investor in Des Moines, Iowa or Toledo, Spain to research and invest in companies from Kuala Lumpur to Sao Paulo. You wouldn't buy stock in a company down the street if you didn't know something about what the company does, would you? The same goes for global investing. What does the company make? What are its financial fundamentals? Who manages it? Who are its major shareholders? What are its strategic advantages? Who is its competition? -
Exploit the small-investor advantage. It's a myth that large investors have an advantage over small investors. Especially when investing in far-off places, small investors can have several benefits, many of them having to do with liquidity. Emerging market stocks, for example, are often so lightly traded that big pension funds and mutual funds won't spend the time researching and investing in them. Institutional investors also tend to put limits on the 'high-risk' portion of their portfolios. And in times of crisis, it's much more difficult for a big pension fund to sell off its $10 million stake in that Chinese cement company than it is for Joe Smith to sell off his $10,000 stake. -
Buy bonds . Don't limit yourself to equities when investing abroad. Global bonds can diversify your fixed-income portfolio, and can bring much higher yields than the bonds of U.S. or major European countries - sometimes without a significant amount of added risk. Price inefficiencies also exist in the bond market, and investors willing to do their homework can find bargains in emerging market bonds. -
Buy mutual funds. I'm a big believer in mutual funds, both in indexed products and in professionally managed portfolios. If you don't have the time and energy to spend researching global stocks, let someone else pick them for you. Your costs will almost invariably be lower than if you tried to build your own portfolio of global stocks. In picking funds, though, be sure to pay attention to costs, tax implications, risk and the track record of both the fund and its managers. Spread the foreign portion of your portfolio across more than one fund. For example, you might buy three funds: a broad-based international fund, a regional fund in an area of the world that you believe will outperform, and an emerging markets fund. www.investingacrossborders.com 'Myth # 6: First mover advantages are key - the early bird catches the worm. Not often, in business. There are very few industries in which being first is the basis of a sustained distinctive capability.' ”John Kay |  |
