The Anna Maria Island Sun Newspaper

Vol. 10 No. 27 - April 7, 2010


Anna Maria Island Sun News Story

Disciplined risk control

Investment Corner

In recent years, the consensus among individual investors has been to increase the portion of their investment portfolio held in international investments. In fact, over the last decade, this has generally been a profitable decision. It is well known that the last 10 years has been tough for investors in stocks, particularly in the 2008 to early 2009 period.

Through Feb. 28 of this year, the S&P 500 Index, a common proxy for U.S. equities, lost an average of 0.31 percent annually over the last 10 years, including dividend income; a total loss of just over 3 percent. The MSCI EAFE Index, the most widely used index for non-U.S. equities, experienced a gain of just over 1 percent a year during the same period, for a total gain of just over 10 percent. Investors in what are known as emerging markets actually did quite well, albeit with a significantly more volatile ride along the way. The MSCI Emerging Markets Index averaged 8.9 percent annually for a total gain of 136 percent.

I like to advise clients that when investing internationally, the level of profit is not only impacted by the rise or fall of the prices of the investments themselves, but by the ever changing value of the U.S. dollar relative to the foreign currency of the country or region where you invest.

For example, the U.S. Dollar Index, which compares the value of the dollar to a basket of foreign currencies in proportion to the amount of trade we have with countries using those currencies, was at a level of about 100 ten years ago. Today it is at about 81, a drop of about 19 percent over the last decade. So, investments or cash held in a diversified basket of foreign investments would show a profit of 19 percent if converted back into U.S. dollars today, even if there was no profit on the invested capital over the last 10 years. This currency gain, due to the drop in the dollar, explains most, if not all, of the excess performance of foreign markets compared to the U.S. markets in the last decade.

Interestingly, from the 100 level on the index in 2000, the dollar rose in value by 20 percent, peaking in 2002 at a level of about 120, before sliding to its lowest level by 2008. Recent trends have seen the dollar rising and, in fact, while foreign stock markets as a group are up about the same amount as the U.S. market so far this year, the rise in the dollar has erased those gains if the investment was converted back to dollars today. The chart below shows the varying value of the dollar over the last 17 years.

The $64 question, of course, is where will the dollar go from here? Predicting currency exchange rates is probably more difficult than predicting the stock market’s next move, and for most it should not be a main focus of your time. The argument that seems to make the most sense to us is that the dollar may well appreciate further against the euro and Japanese yen. Europe and Japan are facing declining populations and may have a hard time generating the economic growth that the U.S. is capable of, despite our obvious challenges of the coming years.

However, it seems logical to assume that the dollar may fall in value against currencies of the major emerging markets and against currencies of countries whose economies are based in natural resources. So, I would not be surprised to see the currencies of Latin America, Southeast Asia, India and China move higher due to their economic growth rates and the currencies of Australia, New Zealand, and Canada move higher as continued demand for natural resources from the aforementioned emerging markets regions continues to increase.

In summary, investing internationally is important for diversification and to seek out opportunity in some of the faster growing regions, but we are not inclined to abandon the U.S. markets. In fact, I think 10 years from now the surprise may be how well the U.S. markets do relative to the markets in Europe.

Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing.

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