Top 3 Adages That International Investors Should Remember
Three Adages that Apply to International Investors
International investors face a number of unique risks when it comes to deploying capital across borders, but at the same time, they have a lot of the same problems as domestic investors. By keeping some common investment adages in mind, international investors can avoid many of the common pitfalls associated with international investing and ensure that they’re achieving the highest risk adjusted returns for their portfolios.
In this article, we’ll take a look at three of the most popular adages and how they apply to the world of international investing.
“Don’t Fight the Fed”
The popular adage “don’t fight the Fed” encourages investors to trade on the same "side" as the U.S. central bank. When interest rates are on the rise, investors should move into defensive stocks as rising borrowing costs take a toll on equities. The opposite is true when interest rates are on the decline where investors should buy equities as borrowing costs become cheaper and companies are able to take on debt to finance rapid growth.
While the advice may not seem relevant to international investors on the surface, the Fed’s rate decisions have a tremendous impact on foreign markets. Many countries and foreign corporations have dollar-denominated debt, which means that rising interest rates can increase the real cost of their debt repayment.
Rising interest rates also draw investors back to the U.S., since they lead to lower prices and higher yields for bonds.
“Diversify Your Investments”
John Templeton’s famous advice – “diversify your investments” – has become a popular phrase among U.S. investors. By investing in broad market indexes, such as the S&P 500, most investors can easily diversify their investments across all different areas of the economy.
A frequent failure among domestic investors is holding too much company stock due to an employer matching plan or stock options being exercised.
In reality, most U.S. investors could use more international diversification in their portfolios, even though the S&P 500 includes multinational corporations. The U.S. accounts for less than half of the global stock market, but makes up nearly three-quarters of U.S. portfolios, according to some sources. Of course, these aren’t problems that are unique to the United States: Canadians hold less than 4% exposure to global equities and Greeks hold just 1% exposure to global equities. The good news is that it's easy to remedy these problems with international exchange-traded funds.
“The Trend is Your Friend”
Technical analysts like to say “the trend is your friend”, which means that most traders are ill-advised to trade against the prevailing market trend. In other words, contrarian investing can be a lot riskier than investing alongside the market’s existing trends, especially when it comes to catching the proverbial falling knife. The key instead should be identifying when trends are just starting, gaining strength, and coming to an end in their various stages.
For longer-term international investors, the adage could also be interpreted to mean that history often repeats itself. Countries, like Argentina, that have defaulted several times in the past may be more likely to make the same public spending and debt mistakes again. Beyond politics, the boom-bust cycles associated with monetary policy (including that of the U.S.) also tends to be cyclical in nature and history tends to repeat itself.
Key Takeaway Points
- International investors shouldn’t try and fight the Fed when it comes to deploying capital around the world, since the U.S. central bank still exerts a lot of influence over global capital flows.
- John Templeton’s diversification advice is often touted, but U.S. investors still have relatively little exposure to international markets, while the problem is even more acute in other countries.
- The common technical analysis adage – the trend is your friend – could be interpreted to mean that history repeats itself and international investors should ensure that they’re trading alongside the long-term historical trends.