Got jitters about the U.S. stock market? MEG RICHARDS says you should invest globally.
Associated Press writer Meg Richards. (AP Photo/Stephan Savoia)
The car you drive is Japanese. Your cell phone is Korean. Your grocery store's corporate owner is in Amsterdam, and your gas station is franchised by a British company.
So how come your investment portfolio is dominated by U.S. stock funds?
You might be a little freaked out by the market's latest shakes, but last week's slide in stocks merely underscores the importance of being diversified -- and that means taking a global approach to investing.
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CHECK THE NUMBERS:
The United States is a major superpower with tremendous influence on the global economy. We are about 5 percent of the world's population, and we produce about 20 percent of its goods and services.
Pretty impressive. But that means 80 percent is being produced elsewhere, noted Diane Maloney, president of Beacon Financial Planning Services in Plainfield, Ill.
"There is real good reason to look at increasing your presence in the international market," Maloney said. "The U.S. share of the market is shrinking and there are other places that are growing. Your portfolio should reflect that."
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CHECK THE MAP:
America is still the world's biggest single-country economy. But American businesses have more competition than ever from large trading blocs across the globe, in Asia, Latin America and the European Union. In addition, many U.S. companies depend on overseas sales to boost their profits.
"You have to consider what's happening in the world," Maloney said. "Globalization is a reality."
Younger investors can benefit from this long-term trend by allocating a portion of assets to a fund that holds international stocks. What percentage of your portfolio you send overseas is up to you, but anywhere from 20 percent to 50 percent in non-U.S. stock funds could be considered reasonable.
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TAKE A GLOBAL APPROACH:
Leave the stock-picking to the experts and get your foreign exposure through a mutual or exchange-traded fund. But remember, this is not about finding the next hot market; you want to own as much of the world as you can, so avoid regional or single-country funds. Broader funds are less risky, especially in volatile markets.
One way to handle this is to pick a global stock fund as your core holding -- the anchor for your whole portfolio, which for most investors need not be more than three to five funds. A global fund does just what you might think: It invests across the globe, and will include U.S. stocks along with foreign holdings. For this reason, a global fund might not be a good complement to a large-cap U.S. stock fund, because their holdings could overlap.
A good example of this kind of fund is T. Rowe Price Global Stock (PRGSX), which is 40 percent U.S. stocks. The rest is sprinkled across the world, in Europe, Latin America, India and other parts of Asia.
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SPREAD YOUR NEST EGG AROUND:
If you're limited to what's available through your employer's retirement plan, don't worry. Chances are you can still add some international flavor to your portfolio. A low-cost index fund, like Vanguard Total International Stock Index (VGTSX) or Fidelity Spartan International Index (FSIIX), can be a great diversifier for a portfolio dominated by U.S. stocks. Just make sure whatever you choose works with the rest of what you own.
Once you've decided what percentage of your portfolio you want to invest in U.S. stocks and what percentage you want in foreign stocks, you'll need to rebalance periodically to maintain that allocation. This will go a long way toward preserving your nest egg, even through market shudders.
"Being diversified and rebalancing won't keep you from being hit, but it will help protect you in a volatile market," Maloney said.
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STICK WITH YOUR PLAN:
When the professional worriers on Wall Street are wailing "SELL," it's hard not to get nervous. But if you're investing for the long term, it's crucial that you stick to your savings plan. Down markets are opportunities to buy low. Don't you like a bargain?
"The market is going to go up and down, always. It's supposed to," Maloney said. "But for the average smaller investor, it's your systematic conduct, more than anything, that will determine your investment results."
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asap columnist Meg Richards is an AP business writer based in Washington, D.C.
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