At a client meeting earlier this week, I was asked if we should stop investing in international stocks, particularly European stocks, in light of the recent financial turmoil in Europe. I think this is a legitimate question that many of our client might also be asking themselves. In response, here is a short video from the Wall Street Journal from earlier this week:
I think that the most important take away from this video is that the global economy is linked in a complex web of connections. When we invest internationally, what we are trying to do is to own shares of companies which not located in the US. The belief is that most of these companies will be profitable over the long run, despite the short-term budget problems facing some European governments.
Here's a short list of such companies, which are owned by many international equity mutual funds:
National Bank of Australia
I make no claim about whether these are good or bad companies, but I do know that most of us have heard of them. I also believe that a truly diversified equity portfolio should include companies like these.
Now, I do have a few comments to make on the video itself. Firstly, there is a discussion about currency hedging in mutual funds. We generally prefer funds that do not engage in currency hedging. This is a pretty complex issue, which I would be happy to discuss in detail with anyone who is interested.
A second issue the video brings up is that, sometimes, what we may think of as domestic only equity mutual funds actually hold a lot of non-US stocks. This is something that also concerns us, so we monitor the holdings of the mutual funds we own so as to make sure that there isn't overlap between domestic equity funds and international funds.