Sunday, September 16, 2012

Think Globally - Invest Globally

In the US we often think of ourselves as the center of the universe and invest primarily in our own country. Many US investors put 15%-20% of their portfolios into international stocks for diversification. That still leaves 80%-85% bet on the US stock market and on the US dollar which is a big bet. Due to more rapid growth in other parts of the world over the past 20 years, the US now represents only 43% of the total global equity market values. Thus, to be truly invested on a globally neutral basis, a US investor would have to put 57% of their portfolio into investments outside the US. Is that a crazy idea or a smart idea? Is that too risky?

Will the USA be a laggard in the global economy going forward?
There is a good chance the USA could be a laggard in the global economy over the next 10 years. I am concerned about our ballooning deficits, increased government control and socialism, massive government spending, Social Security/Medicare shortfalls, and the rising tax rates that will be coming. Our corporate tax rates in the US are already the second highest in the developed world. Significantly higher tax rates in the future are inevitable to pay for all this spending and that will dampen economic and profit growth in the US. The government is now talking about healthcare reform in the US that will increase our deficits by another trillion dollars (CBO estimate) over the next 10 years. All of this excessive borrowing, spending and money supply growth has the potential to further reduce the value of the US dollar and to lead to future inflation. That is not good for US investors going forward. Our government, financial institutions, and consumers all have too much debt. They will be deleveraging over the next 5+ years to fix that problem. This deleveraging process will reduce future economic growth. It appears that the US dollar has the possibility of being replaced as the "global reserve currency" as many other international governments (such as China) and investors are worried about these same structural issues in the US. The US dollar recently (September 2009) sank to the lowest level for the year relative to other currencies. Has the USA passed its peak as the dominant and most successful economy in the world, much like the United Kingdom did 110+ years ago? US dollar weakness, relatively sluggish US economic and profit growth, and possible rising inflation in the US are several reasons to consider being diversified internationally. By investing internationally you are protecting yourself from a falling dollar.