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Roundtable Q&A: International Economic Instability vs. Personal Finances

Roundtable Q&A: International Economic Instability vs. Personal Finances

Financial instability can always exist in some form across different countries throughout the world. The challenge for the personal investor is understanding which international issue will affect them, and how. Given the complex nature of the global economy, recent instability in China and Greece can be confusing business. Business in the Heart of Florida Magazine invited two esteemed Gainesville financial advisors to weigh in on how these two markets on the other side of the world can affect the personal investor.

1. How should investors respond to the situations in Greece and China?

W.J. ROSSI: 0.03 percent of the global investible universe is in Greek stocks; this compares to 3 percent in Chinese stocks (according to the MSCI ACWI1 index). Changes (in) China’s financial markets are significantly far more material than Greece’s. Investors, on average, won’t be too affected by what happens to China unless they have more exposure than these two weights. The greatest impact will likely come from the market psychology surrounding both countries. A problem is only as big as people make it — that’s definitely true in this case. China is a market that cannot be ignored as the growth of its middle-class population fuels further economic gains. The short answer is to watch closely to see what unfolds over the next six months but not take drastic actions at this point.

JOE LOWRY: As it pertains to China, our concerns revolve around its nontransparent financial system which makes true financial analysis difficult to conduct. That China continues to be an emerging economic powerhouse, and will continue to be so, is undisputed. Hence, it would be foolish to overlook its influence on world markets.

Greece, on the other hand, is an economy in turmoil and it appears that it will continue to be so for the foreseeable future. Saddled with unrealistic social program and entitlement obligations, Greece is a textbook study on government promising more than it can deliver. Those promises, now in essence backed by advances from the European Bank, have created a financial scenario that will be quite interesting to observe as the situation continues to unfold.

Though the size of the Greek economy is miniscule in relation to the world economy as a whole, the fact that its debt has grown to a substantial number, and its ability to service its debt has become undoable, make it worthy of observation. Any collapse or restructuring of the Greek debt situation may well provide a roadmap for similarly positioned members of the European Union to follow suit. Such a progression could spell a further weakening of the euro relative to the dollar, and perhaps a weakening of the EU’s political structure.

2. What should investors consider in determining what percentage of their portfolios to invest internationally?

W.J. ROSSI: A percentage allocation to international investments begins first with identifying how much stock market risk you can handle. When you figure out what portion of your investing wealth should be allocated to stocks, you can make further decisions about how much of that should be outside of the United States. Just under half of the universe of world stocks is outside of the United States, so many begin with that as a starting point and work back to an allocation that way. For us, an allocation of 50 percent abroad (between both developed and emerging markets) is too much. Therefore, we allocate far, far less than this “market” weight. A Vanguard study placed the ideal allocation to international stocks between 30 percent and 40 percent of a stock portfolio to gain the benefits of diversification2. Our own research puts that number within Vanguard’s range. There is no one-size-fits-all allocation, however.

JOE LOWRY: The argument for investing in international stocks has long been supported by statistical analysis and actual investment outcomes. The answer to the question of what percentage of your investment dollars to allocate to foreign markets, and where specifically to apply them, are the more important considerations.

Whereas our focus tends to be company vs. country-oriented, we feel somewhat less susceptible to the underlying and/or emerging risks caused by economic uncertainty in the United States or abroad.

Pursuant to that focus we direct our client investment monies into portfolios whose research is company performance-based vs. country performance-based. In this manner we can target specific opportunities which are less reliant on where the company resides, and more specific to the goods and services it produces and its specific product/service sector dominance from a global perspective.

As to the question of what percentage of a client’s monies should be allocated internationally, that number can vary depending upon the client’s risk tolerance and comfort level with international holdings, but in all cases some level of exposure is appropriate

3. What types of funds are available globally?

W.J. ROSSI: Foreign companies typically list their stocks on foreign exchanges. U.S. investors can find many of these stocks on domestic exchanges in the form of American Depository Receipts (ADRs). Exchange-Traded Funds (ETFs) and mutual funds provide access to baskets of these securities. The Schwab Emerging Markets Equity ETF (SCHE), for example, tracks as closely as possible the return of the FTSE Emerging Index and holds as many as 703 stocks. Its annual expense ratio is only 0.14 percent.

JOE LOWRY: There are 3 basic ways a mutual fund investor participates in the global capital markets. The first can be through a US-based mutual fund that makes investments in US-based companies doing business overseas (multinational companies). One of the more prominent examples could be Coca-Cola who, while being US-based, derives the majority of its revenues from overseas business activity. The second way is by purchasing an international fund that is only permitted to invest in and hold securities of companies based outside the US. This category of fund may include companies found in emerging economies like South Africa, Southeast Asia and South America.

Another, more explicit way, is by investing in a Global fund which, by virtue of its more flexible policy, can invest both domestically and abroad. Investors who are more risk-averse regarding foreign investing may find a level of comfort in using a Global fund. Theoretically, such a fund can shift its allocation from heavily domestic to heavily international, or vice-versa, depending upon the relative attractiveness of the one over the other. Each type of fund offers its own unique approach to how one might achieve an exposure to international investment opportunities.

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4. What are some current international opportunities?

W.J. ROSSI: Most investing should be long term when it concerns stocks, therefore we won’t speculate on what is a current opportunity. One should own international equities now for the long-term in order to gain the benefits of diversification and get alternative sources of total return in their investment portfolios where stocks have a place. That said, we do make changes to our client’s portfolios from time to time in regards to international stock allocations. We do so, however, after understanding the broader picture of their financial lives and gauging their tolerance for risk. With that said, emerging markets currently offer an opportunity based on valuations. Emerging markets are very volatile, so be careful over weighing too much in that category.

JOE LOWRY: As of this writing we consider the European sector to be in general, attractively priced, offering an excellent opportunity for long-term investors to consider.

The recent declines in the value of the euro, coupled with the instability in Greece and elsewhere in the sector, have combined to depress market prices and create some attractive valuations and opportunities for investment.

We always prefer funds that focus on what we consider high-quality companies. These are companies that excel in their market sectors, and whose valuation make them attractive for acquisition. As was mentioned earlier, the quality of the company is of greater importance than the specific location, though major events, like the Greek debt crisis, can play a role in investment choices.

W.J. Rossi offers securities through Valmark Securities Inc. (Member of FINRA/ SIPC). He also offers advisory Services through Koss Olinger Consulting, LLC, an SEC Registered Investment Advisor. Valmark Securities Inc. is separate from Koss Olinger Consulting. Koss Olinger is located at 2700-A NW 43rd Street, Gainesville, Florida, 32606. The material contained in the herein is for informational purposes only and is not intended to provide specific advice or recommendations for any individual nor does it take into account the particular investment objectives, financial situation or needs of individual investors. The information provided has been derived from sources believed to be reliable, but is not guaranteed as to accuracy and does not purport to be a complete analysis of the material discussed, nor does it constitute an offer or a solicitation of an offer to buy any securities, products or services mentioned. Past performance does not guarantee future results. The FTSE Emerging Index and MSCI ACWI Index are not directly investable indices. The opinions expressed do not necessarily reflect those of author and are subject to change without notice.

Joe Lowry Sr., is a financial advisor at Lowry Financial Advisors, located at 12921 SW 1st Rd #215, Tioga, Florida, 32669. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. He offers additional Advisory Services through Lowry Financial Advisors, a Registered Investment Adviser. Commonwealth Financial Network is separate from Lowry Financial Advisors. He can be reached at 352-333-7990.

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