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Monthly Archives: December 2016

Invest Internationally From the U.S. | How to Do it ?

Four Things to Consider Before You Invest Internationally

1. Local knowledge matters: To best understand the culture, customs, current events, fads and politics of a nation, you need to physically be in the country. Being local will provide the ultimate environment for research and better timing for investing.2. No two markets are alike: Different countries’ markets command different multiples, and investor demand varies. Here are some reasons for this:

  • Monetary and fiscal policy will vary from country to country.
  • Yield curves vary as well.
  • Investment activity is influenced by different groups. For example, in some countries, pension plans play a far greater role in the markets. In other countries, individual investors are a more prominent force.
  • The stage of economic growth (whether the economy is emerging, expanding, mature or contracting) affects the country’s growth and risk outlook. (See”Emerging Markets Are Not a Monolith”.)

3. Companies vary — even within the same industry: An American retailer may be quite different from, say, a Japanese retailer. If you don’t believe that, then compare the shopping experience at Macy’s ( M) with that at Mitsukoshi.4. The impact of foreign exchange (FOREX): When you invest overseas you are investing in two assets: the underlying asset stock or bond and the country’s currency. The changing relationship between countries’ currencies will have an impact on direct investing in a foreign security. I will discuss this in greater detail a little later in this article.Other factors to consider when investing internationally include the global differences in accounting and taxes.

Three Ways to Invest Internationally

Here are three effective ways to invest internationally from within the United States.

1. Country-specific or regional funds:

Through Internet-based “long distance” research, it is far easier to gauge how the broad market will fare in (for example) South Korea or Italy than to do so for individual companies like South Korea-based Samsung or Italy-based UniCredito Italiano.Most countries have a benchmark index like the Nikkei 225 in Japan or the DAX in Germany. In addition, many international investors will use the MSCI set of international indices as guideposts for foreign investing.Once you decide on a country or region to invest in, there are two effective ways to play country funds: exchange-traded funds (ETFs) or closed-end mutual funds.This strategy of understanding and investing in an entire country’s or region’s economy, market or foreign exchange is a less complex and less risky endeavor than taking a more precise position in an individual foreign company.Markets I like, and why:I like Hong Kong and China due to the emergence of capitalism and expansion of infrastructure; Israel as a hotbed for technology and biotechnology; Australia for its overall strong growth, currency and mining industry; South Korea for its tech growth; and Mexico and Brazil for their key roles in expanding Latin American economies.To get exposure to a few of these countries, I own country-specific funds such asFirst Israel Fund ( ISL), iShares Brazil ( EWZ) and iShares South Korea (EWY).When you identify the country or region that you find investment-worthy, remember to research (as always) a few fund “product names” before picking one. As “Busting the Mutual Fund Myth” shows, not all funds are alike.

2. Foreign-based companies:

Given the earlier list of considerations, if you are comfortable investing in individual foreign-based companies, you need to understand how the markets for international stocks work.Foreign stocks are traded on the home-country exchange and referred to as ordinary shares. Ordinary shares are denominated in the home-country currency. Many foreign companies will list their stocks in the United States in securities called American Depository Receipts (ADRs).Here is the catch: there is a formula to convert the price of ordinary shares into that of ADRs. Here it is:ADR Share Price = Ordinary Share Price (x) Conversion Ratio of Ordinary Share Price to ADR Shares (x) Foreign Currency Exchange RateHere is an example:

The price of BHP Billiton (BHP.AX) ordinary shares is AUD (Australian Dollars) 43.10 (1 AUD = 0.875 U.S. Dollars).There are two ordinary shares for every ADR.

Thus, the theoretical price of the BHP Billiton ADR ( BHP) equals:

43.10 x 2 x .875 = $75.43

As you can see the risk in investing in ADRs is multivariate.Also, sometimes there are natural spreads between the ADR and its theoretical price. This is due to supply/demand conditions, conversion fees, arbitrage activity and taxes.All of this adds to the complexity of investing in individual foreign companies.Given my background and experience, I am comfortable holding ADRs. A few I own include China Life ( LFC), the largest insurance company in the largest country,China Mobil ( CHL), the largest mobile carrier in the largest country and Australia-based BHP Billiton, a major global commodities player.

3. U.S. multinational companies:

There is a multitude of American companies that have huge revenue and cash-flow generation from overseas operations. Take for example a company like McDonald’s( MCD), which I own. McDonald’s has roughly 50% of its revenues sourced from international markets.A company’s international business information can easily be obtained in its quarterly earnings releases and annual reports or earnings conference calls. In addition, some companies provide easy-to-read fact sheets or “tear sheets” with operating information on their Web site (look for the “Investor Relations” section).In addition to McDonald’s, my multinational holdings include stocks such asFreeport-McMoRan ( FCX) and Google ( GOOG), both of which have significant international revenue sources.

Financial Goals Still Fall Short

The good news is many Americans are planning for the future – with over half making long-term plans. The bad news is what “long-term” means to most Americans.

While 57% of Americans are making long-term plans, most people define “long-term” as just 4.4 years on average, according to a recent New York Life survey.

“It’s surprising to me that 4.4 years would be considered ‘long-term,’ because we generally define long-term financial planning as ten-plus years,” said Justin Richter, senior wealth advisor with Mariner Wealth Advisors.

Richter said a well-structured financial plan must be balanced across all time horizons, requiring trade-offs and careful consideration of a client’s priorities and goals — which is why it’s important to work with an advisor who can take the time to understand these things in order to address both near-term and long-range needs.

“It’s important to convey how short-term decisions may impact long-term goals,” Richter said. “Most people are, by nature, focused on the here and now, so I view it as a significant part of an advisor’s job to help clients keep the big picture in mind. This may mean showing clients how maintaining a certain spending level today could result in the need to push back their retirement age from 60 to 65, for instance.”

Many financial planners agree long-term likely should mean something that takes a look at when someone wants to retire.

“Long-term planning is really different for everyone, but a good point to start is at looking for a retirement date,” said Kevin Ward, president of Park & Elm Investment Advisers in Indianapolis. “By creating a vision for retirement, we can better create a long-term plan of action beyond 4.4 years. This vision for the future can help take action steps in the present to better prepare.”

Ward adds if someone is not sure when he wants to retire, he can work backwards, and figure out what he may want to accomplish with his time.

“Maybe start another business, go back to college, travel, etc.,” he said. “By helping to create the vision, now we can determine the amount of money needed to fund this lifestyle. Creating a plan and action steps now will show exactly when this is achievable.”

Ron Madey, president and chief investment officer of Wealthcare Capital Management, said a long-range plan isn’t for an arbitrary length of time, but refers to planning for your life, from the moment one claims themselves as an independent to the moment they face end of life issues.

“A long-range plan means planning for life events and making adjustments as life unfolds,” Madey said. “The specifics of retirement 30 years from now have a lot less visibility compared to five years from now. Planning for the next 4.4 years of your life is planning for something with high visibility, such as buying a house or getting married — these plans are for relatively near-term, visible and concrete goals.”

Jack Cooney Jr., principal at Bleakley Financial Group in New Jersey, said planning your financial future in four- or five-year slices is a fundamentally flawed way to ensure a comfortable retirement.

“Planning over longer time periods, on the other hand, has many benefits, such as long-term compounded growth of assets, avoiding short-term uncertainty and minimizing the impact of volatility,” he said. “The long-term can be defined as starting today and running through the completion of a person’s longest goal.”

Cooney said what is important is to set financial goals.

“A long-term financial plan should consider a person’s full life expectancy,” he said. “This time period could easily be 50-plus years.”

He continues that many people do not realize that time is a key economic resource that must be managed wisely.

“This will mean that the plan will remain flexible and include contingencies for unexpected life changes,” he adds.

How to Invest the Long Run

Being an optimist myself, I don’t particularly like busting other people’s bubbles — we’ve had enough of those lately. Nonetheless, for my inaugural Long Run column, I have to begin on a negative note: Investing isn’t going to be easy the next few years.”For the long haul, we’re going to be in for a period of fairly tough markets,” says Ralph Wanger, manager of the ( ACRNX) Liberty Acorn fund since 1970. “You’re going to have to have substantial skill to prevail, because you can’t wait for the markets to bail you out.”If you’re still reading — indeed, if you’re still checking out TheStreet.com and other financial news publications — then the bear market hasn’t scared you away. That’s wise, because stocks remain investors’ best bet for the long haul. However, we are in a new era, only not the one people were touting a few years ago.From August 1982 to March 2000 — the greatest bull market in history — real returns averaged 15.6% a year, according to Jeremy Siegel in his book Stocks for the Long Run . That’s more than double the historical rate of equity returns. Regression to the mean hasn’t been fun.This doesn’t mean that you can’t make money. It simply means that the rules of the game have changed — and some tried-and-true rules have returned with a vengeance. Investors who adapt to the changes will fare better than those who are still using the old playbook. The Long Run aims to help long-term investors succeed in this new era, whether the market goes up, down or sideways.In the coming weeks we’ll discuss some smart investing ideas for the long run. But this week, let’s start out by revisiting the Rules of the Game.

Know Thyself

There are plenty of investing strategies out there — buy and hold, deep value, active trading, index investing. The first real step investors should take is determining exactly what type of investor he is.”For a long-term investor, you have to know yourself,” says Michael Mach, manager of ( EHSTX) Eaton Vance Large-Cap Value . “The key is to pair your personality with a logical investing approach. If you apply it consistently, you’ll prove successful.”If you don’t mind taking on a heaping portion of risk — and don’t lose your cool during periods of extreme volatility — you can probably embrace a more risky strategy. Since most investors fall into the uncool camp (myself included), the Long Run will often focus on strategies that avoid undue risk and market-timing, favoring fundamental analysis and longer time horizons.Also, you have to be honest with yourself about how much time you will devote to tracking your investments. It’s best not to take big stakes in a few companies in the rapidly evolving biotechnology industry, for example, if you don’t plan to keep up with sector developments.

Diversify

Diversification is probably the simplest truth in all of investing — and the most often misconstrued. In the 1990s, asset allocation for a lot of people meant 100% stocks, and about 90% of those stocks were large-cap growth.Virtually all investment vehicles have their ups and downs. However, too many individual portfolios consist of holdings that all move up at the same time and back down at the same time.”Investors need diversification, and by that I mean they need to diversify away from large-cap domestic equities,” says Louis Stanasolovich, founder and chief executive of Legend Financial Advisors in Pittsburgh. “Buying three Fidelity funds, two Janus funds, American Funds Growth Fund of America and an S&P 500 index fund is not diversification.”To achieve real diversification, investors need to build portfolios using investments with lower correlations to one another. For example, for your equity holdings, consider paring back your large-cap weighting and boosting exposure to emerging markets, international stocks, smaller-cap stocks and real estate investment trusts. (Using quantitative models, Stanasolovich has designed a well-diversified, “lower volatility portfolio” that returned 22.3% in 2000, a negative 2.2% in 2001 and negative 4.25% in 2002. In a forthcoming Long Run we’ll discuss diversification with him at greater length.)

Reinventing Do-It-Yourself Investing

One of the supposed hallmarks of the bull run of the 1990s was the rise of the do-it-yourself investor. The collapse of the stock-market bubble has led some pundits to declare the do-it-yourself movement dead.This is rich irony. One of the primary reasons why investors got so over their heads the past few years is that the notion of “do-it-yourself investing” was cast aside — or at least poorly redefined. D-I-Y investing doesn’t merely mean watching business news, reading The Wall Street Journal or TheStreet.com, listening to analysts or inside tips from your brokers; it means pulling up your shirtsleeves and doing your own additional research before making decisions. Doing it yourself isn’t buying the stock that a professional or CEO just mentioned on CNBC.To redefine do-it-yourself investing, I’ll defer to the original meaning of the phrase, succinctly put by Peter Lynch in One Up on Wall Street way back in 1989. “Stop listening to professionals! … Ignore the hot tips, the recommendations of brokerage houses and the latest ‘can’t miss’ suggestion from your favorite newsletter — in favor of your own research.”This isn’t to suggest that you disavow all mutual fund managers, stock analysts, business news pundits and all other professionals. There are plenty of intelligent and trustworthy folks who can help you be a better investor — and in the Internet age, you have plenty at your disposal. It simply means “trust, but verify.” Use these resources to supplement your research, not replace it.

Be Passionate About Investing, Not Your Investments

Being a successful do-it-yourself investor involves a lot of fundamental analysis, poring over company statements, analyst reports and online and offline research. You have to be passionate about it. You shouldn’t, however, be overly passionate about the investments you make.”You have to be unemotional about the investments you hold,” says Eaton Vance’s Mach, who studied psychology at the University of Chicago and was a family therapist before managing money. “You don’t want to be driven by emotions like fear and greed.”This always holds true. But it becomes especially important to remember in a topsy-turvy market marked by lots of sudden moves but no sustainable upward trend. Investors need to stick to their guns and not blindly follow.”A lot of people wanted to sell everything in September 2002 because they thought the world was ending, then in October they wanted to buy everything because we were going to the moon again,” Wanger says. “Turns out, neither one was such a good idea.”

The New Era

To get a sense of what the new era might look like, let’s take a quick look past the market peak of 2000 to two previous stock market peaks: 1929 and 1966. Stocks didn’t return to their previous heights until 1954 and 1982, respectively. When you adjust for inflation, make that 1955 and 1994, Wanger says.I’m not sure if it will take a quarter century to get back to March 2000 levels. But I do think investors need to realize that getting rich quick in this market isn’t a recipe for success. I am also fairly confident that overweighting the previous decade’s leaders — technology — isn’t such a hot idea either. The 35-year chart below shows what happened to the energy sector after the energy bubble burst in 1980, and how technology has performed before and after its bubble.

The Way to Make Huge Finance Gains

The Power of a Raise

Let’s say you currently make $60,000 per year and you’re able to negotiate a 10% raise (more on how to do this below).

Assuming that 25% of that new income goes to taxes, that means you now have an extra $4,500 to save each year, which is almost enough to fully fund an IRA.

Looking at it another way, that extra $4,500 represents a 7.5% return on investment, which is right in the range of what experts expect from the stock market.

So by negotiating a raise, you’ve given yourself a stock market-like 7.5% return. And unlike the stock market, that 7.5% return will be consistent year after year.

And if you’re investing that $4,500 each year, you’ll earn additional returns on top of your contribution. Assuming a 7% annual return, that investment will grow to $197,393 after 20 years and $454,828 after 30 years.

Plus the increased salary sets a higher baseline for future raises and for your salary at future jobs, making it more likely that your income will increase even further over time.

And all of that comes with pretty much no risk. As long as you present your case respectfully, the worst that happens is you get a no. And even then you’ll have planted the seed, which may make it more likely that you’ll get a raise in the future.

How to Get a Raise

Of course, the trick here is knowing how to negotiate so that you actually get the raise you deserve.

This can be intimidating for a lot of people, myself included! But the good news is that there are some simple strategies you can follow to strengthen your position and even increase your value in the eyes of your employer through the negotiation process.

My favorite resource on this topic is Ramit Sethi’s Ultimate Guide to Getting a Raise & Boosting Your Salary. Yes, the title is a little hyperbolic, but the advice is practical and solid.

And remember, as long as you present your case well, the worst that happens is you get a no. There’s little risk in giving it a shot.

Side Hustle for Extra Income

Getting a raise isn’t the only way to increase your income. People are increasingly turning to side hustles as a way to make some extra money on top of their day job.

There are lots of ways to do this, from dog walking to freelance writing to website design. It doesn’t have to take a ton of time, and even a little extra income can go a long way.

J. Money at Budgets Are Sexy has chronicled over 60 different side hustles real people have used to earn extra money. You can also check out the websites Fizzle and Side Hustle Nationfor ideas, inspiration, and practical advice on how to get started.

Invest in Yourself

Cutting costs is often the easiest first step towards saving more money.

But over the long term you are your own best investment opportunity, and finding ways to earn more money can make a big difference in your ability to reach your biggest goals.