Early 2012 has been kind for investors of U.S. equities. With the S&P up almost 9% already this year, it seems that a sense of consumer optimism has returned — at least within our national borders.
But compare the recent economic upswing domestically to the continued troubles abroad. Although international stocks also seem to have rallied this year, many continue to question whether they should remain invested abroad, particularly in the euro zone. Such fears linger in spite of (or perhaps because of) the last-minute bailout deal struck between Greece and the European Union last week.
The decision to aid Greece was complex, involving private bondholders taking additional losses on Greek government bonds, the European Central Bank and other banks agreeing to distribute profits from bond-buying back to Greece, and austere national cuts proposed, including a 22% reduction of the minimum wage.
Generally, the agreement was hailed as a step in the right direction, necessary to stabilize the area and prevent short-term default. However, many also predict that stagnant economic growth may likely continue because the deal only buys time, without addressing the fundamental problems of Greece and other countries such as Italy, Portugal and Spain.
This dire international forecast follows an already very difficult year, with the MSCI EAFE returning -11.8% and the MSCI Emerging Market Index returning -18.2% in 2011. In this environment, why invest internationally at all? Would it make more sense to avoid international and emerging stocks and bonds altogether or to significantly reduce one’s exposure?
Historic performance suggests that, over the long-term, it pays to remain invested in a broad basket of asset classes, including having exposure to international and emerging markets. It bears noting that the U.S. equity markets represent only about 40% of total global equities; and that U.S. bonds account for only about 20% of the total bond market. To avoid international investments altogether would be to fail to participate in a significant portion of the total global market.
Remember that as recently as 2009 international and emerging market stocks produced some of the strongest returns. By opting out of a particular asset class, investors may avoid short-term lows, but they also would miss out on the benefits of high-performing periods.
Some might argue timing the markets by pulling out of the euro zone now but investing back in when circumstances are more favorable — like another 2009. However, not only are markets unpredictable, but behavioral finance suggests that individual investors have a tendency to sell when investments are performing poorly and buy at their peak (hence, the urge to sell European bonds now). The better advice is to remain disciplined in your long-term investment strategy and rebalance your portfolio as needed, not because of short-term headlines.
Still, with troubles continuing to plague Europe, caution may be well advised. Although investors should not pull out of international stock and bond funds entirely, it may make sense to review international positions in this environment.
For example, check your bond positions to ensure that you own only the highest rated debt from financially stable countries such as Germany. You also may want to make sure that your holdings, if any, in Greece and other areas in danger of default are kept at a minimum.
Finally, meet with your wealth adviser to ensure that your overall exposure to international stocks and bonds makes sense give your risk-return profile and that you are still broadly diversified across many other asset classes.
Tom Orecchio is a principal and wealth manager with Modera Wealth Management, LLC (“Modera”). Nothing contained in this blog should be construed as personalized investment, financial planning or other advice, and there is no guarantee that the views and opinions expressed herein will come to pass. Investing involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be construed as a solicitation to buy or sell any security or engage in any particular investment strategy.
Modera is an SEC registered investment adviser. For more information about Modera, including our registration status, fees and services, please refer to the Investment Adviser Public Disclosure web site at www.adviserinfo.sec.gov or visit our web site at www.ModeraWealth.com or contact us at (201) 768-4600 to obtain a copy of our Disclosure Brochure.
Thomas A. Orecchio, CFA, CFP, ChFC, CLU, AIF is principal and wealth manager at Modera Wealth Management in Westwood,NJ. From portfolio management and tax planning alternative investments and estate planning, Tom assists physicians through truly comprehensive wealth management. Mr. Orecchio can be reached at TomO@ModeraWealth.com.
Tom Orecchio examines the principles of wealth management and financial planning-from portfolio and tax management to alternative investments and estate planning-to help physicians achieve financial success.