Own the World

Global investing isn't new. In fact, investors have been looking to overseas markets for hundreds of years, and with good reason. A global portfolio can bestow innumerable rewards on the savvy investor, yet many US investors remain woefully under-exposed to foreign equities. Despite the fact that US equity markets make up less than half of world markets, only a small portion of our investment dollars are allocated overseas. Even the most sophisticated investors have been deterred by misconceptions about the risks associated with owning foreign stocks or a lack of information about foreign markets. But the notion investment options are limited by borders is antiquated and downright detrimental to successful investing.

Once considered the playground of only the ultra-rich or institutional investors, global investing is fast becoming not only possible, but a necessity, for every investor. As part of Fisher Investments Press, Own the World introduces readers to the vast advantages of seeking investment opportunities all over the planet. Own the World provides investors with tools to build a global portfolio and points out potential hurdles to avoid. It also educates readers on the nuts and bolts of foreign markets, how to easily understand them, and vehicles for investing there. By detailing the vast and currently underappreciated benefits of global investing and the distinct advantages of a global approach, as well as common pitfalls to avoid, Own the World can help readers to tread more confidently into global markets as they look to optimize their investment results.

Preface ix

Acknowledgments xiii

Chapter 1 Who Needs a Global Investment Portfolio? 1

The Most Important Question 2

“Home, Sweet Home” Bias 4

We’re Not Alone Out There 14

Global Isn’t International 15

Chapter 2 Not as Foreign as You Think 17

Made in the USA 17

A Day in the Life 23

Chapter 3 Getting More for Less: Return Enhancement and Risk Management 31

Risk and Return: The Dynamic Duo 31

Keep Your Eye on the Globe 48

Chapter 4 The Global Landscape 55

An Economic Perspective 55

What’s Your GDP Worth? 62

Taking Stock . . . Globally 66

Industry Classification 73

GICS 73

Chapter 5 Top-Down Investing 81

Are You Down for Bottom-Up or Up for Top-Down? 81

Top-Down Is Tops 83

The Top-Down Process 86

Step 1: Asset Allocation 86

Step 2: Sub-Asset Allocation 90

Step 3: Stock Picking 100

Chapter 6 Four Steps to Investing Success 105

Step 1: Choose a Benchmark 106

Step 2: Analyze the Benchmark’s Components and Assign Expected Risk and Return 118

Step 3: Blend Dissimilar Investments to Moderate Risk Relative to Return 124

Step 4: Always Remember You Could Be Wrong, So Don’t Stray From the First Three Steps 126

Chapter 7 I’m Convinced . . . Now Tell Me How 129

Who Doesn’t Want More Time and Money? 129

Mutual Funds 134

Exchange-Traded Funds (ETFs) 144

Depository Receipts 149

Ordinary Shares 155

Chapter 8 The Currency Effect 157

The Almighty Dollar, Euro, Pound, Ringgit, Baht . . . 158

Currency Trivia 162

Wrangling Exchange Rates 165

Currencies and Your Global Portfolio 172

What’s a Global Investor to Do? 174

Currency Strategies 175

Trading Currencies (If You Dare) 177

Chapter 9 Common Challenges in Global Investing 181

Volatility Happens 183

Dollars and Sense 185

Political Risk 185

Risks, Risks, and More Risks 190

Notes 193

About the Author 199

Index 201

AARON ANDERSON is a Capital Markets Research Analyst at Fisher Investments where he focuses on global macroeconomic and market trends. He holds BS degrees in geophysics from the University of California, Santa Barbara and applied economics from the University of San Francisco. Anderson writes a regular column for MarketMinder.com titled “The Global View”, and instructs at investing seminars nationally. He and his wife Kim reside in Danville, California. They enjoy traveling (and investing) all over the world.

Despite the fact that foreign stocks make up a larger portion of world equity markets than U.S. stocks, only a small portion of American investors’ dollars are allocated overseas. Many of the world’s biggest and fastest-growing companies are located outside the United States, so a global portfolio can bestow rich rewards on the savvy investor. But increased return opportunities aren’t the only benefit. Greater opportunities for risk management through diversification are another important advantage of a global investment portfolio. Yet even the most sophisticated investors have been deterred by misconceptions about the risks associated with foreign stocks and the seeming lack of information about foreign markets.

Own the World will educate you on the importance of going global, the investment vehicles providing access to global markets, and potential pitfalls to watch out for when expanding portfolios overseas.

Author Aaron Anderson, an analyst at Fisher Investments, describes the benefits of global investing in straightforward terms. He explains that many of the world’s most successful firms are located outside the United States, including many of the companies Americans rely on most. He details how investing globally can increase diversification and reduce portfolio risk because different conditions in different countries can cause domestic and foreign stocks to be imperfectly correlated. The author provides an overview of global stock markets and describes how to efficiently employ a top-down approach to building a global portfolio. He outlines some of the factors impacting stock prices around the world as well as some of the more challenging aspects of global investing, such as political risks, different accounting standards, and others. He further explains that, in many cases, the perceived risk is greater than the actual risk.

While global investing can’t insulate investors from all the ups and downs inherent in stocks no matter where they’re from, it can unleash myriad opportunities to take advantage of the growth potential and risk-reducing benefits of stocks around the world. This book can show you how to take full advantage of these tremendous opportunities.