Monday, April 5, 2010

Should I invest in China?


QUESTION: Looking at international stock, it appears that companies in China are going strong. I’m wondering if that’s a market I should consider as an investor. Are there mutual funds that specialize just in China? Or should I look at individual stocks in China? Or is it even wise to concentrate in one country?

ANSWER from Dan Danford: International investing is one facet of a well-diversified portfolio. There are multiple ways to accomplish that, and you mention several. I'll get back to that in a minute.

Remember, though, that any investment "idea" is already factored into market prices by the time you hear it. By the time you read something in Money magazine, or the local newspaper, it's been circulating in investment circles for a very long time! That means that smart money has already acted on the idea, and it's likely that prices already went up as a result. The time to buy a really good idea is before prices go up. Go back and read those articles again: I'll bet one "proof" of their idea's worthiness is that prices have already risen. That should be a warning sign, not a buy signal.

That's why market timing doesn't work very well. Our suggestion is that you build a well-diversified portfolio - including China and other foreign countries - regardless of current news. That way, you'll be buying some segments before investors drive up the prices. Over time, this approach accomplishes solid returns with less risk.

A good international mutual fund will already own some Chinese investments, along with promising companies around the world. If you choose, you can buy Exchange Traded Funds ("ETFs") that specialize in certain countries or regions. Check out iShares at www.iShares.com for detailed information. Again, though, we'd suggest that you build a diversified portfolio, and not attempt to time the various international markets. ETFs tend to be index funds, so you may choose a no-load mutual fund with an accomplished manager. We like Scout Worldwide (UMBWX) right now.

Buying any particular international company is risky, indeed. The usual company risks are augmented by a few others. Currency risk, political risk, and international trade risks, to name a few. Best to leave this to expert international fund or index managers.

Don't forget that many U.S. companies draw considerable profits from sales in other parts of the world. Some professionals point out that the S&P 500 (large U.S. companies) has a strong international component. Many large companies here are genuinely multi-national and owning them already adds an international flavor to your portfolio.

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