In the last few years, many U.S. investors have begun pouring money into global mutual funds, and they think they're getting great diversification.
However, many of the funds receiving the biggest inflows are about as authentically foreign as an Italian meal at the Olive Garden!
Here's why:
A lot of so-called "global" mutual funds have only 30% or 40% of their portfolios in foreign investments. Plus, many "emerging market" funds are heavily concentrated in mega-cap multinational companies that have huge U.S. businesses.
So these funds could suffer grievously when the U.S. economy sputters.
I'd like to take this a step further …
The typical U.S. investor considers foreign stocks and bonds to be extremely risky. So they allocate perhaps 5% or 10% of their holdings to international investments. In contrast, my colleagues and I believe the vast majority of investment risks are currently found in the U.S.
As a result, we recommend investors allocate at least 90% of their portfolios to non-dollar-denomina ted assets!
If you've been steeped in the rhetoric of Washington and Wall Street, that might sound extreme. But when you consider the current realities of the global economy, then I think you'll agree that our suggested approach is not at all risky, extreme, or as some would even argue, unpatriotic.
The Typical Foreign Stock Has Better
Fundamentals, a Superior Yield, and a
Lower Valuation than its Domestic Counterpart.
Plus It Protects You Against a Declining Dollar.
We believe that the growing imbalances in the U.S. … its twin budget and current account deficits … its lack of domestic savings … and the erosion of its industrial base … have now reached a tipping point.
In our view, the dollar will have to decline substantially in value, perhaps as much as 50% or 75%. The principal factor that has prevented this from happening already is the unprecedented currency intervention of foreign central banks.
When this crutch is removed, and one day it will be, the dollar will fall hard. We do not celebrate this trend, but we do recognize it as an intractable force.
Some assume that a declining dollar is only a problem for those Americans who vacation abroad. What they don't realize is that a weakening greenback will also raise the cost of living right here in the U.S.
A falling dollar will not only limit the amount of goods flowing into the U.S., but also increase the share of U.S.-produced goods and services flowing overseas (as foreigners outbid Americans). The drop in supply means that prices will rise in real terms.
Buying foreign shares can help you prepare for that scenario, because you'll be setting yourself up for higher current income.
Moreover, we believe this rise in income will occur precisely at a time when income from other sources, such as wages, stock price appreciation, and home equity extractions becomes increasingly hard to come by.
We are not alone in our view that the greenback will fall, either. Former Fed Chairman Paul Volker, PIMCO Bond specialist Bill Gross, and legendary investor Warren Buffett have all sounded the same warning.
In fact, Buffett is positioning his own portfolio for that day. His holding firm, Berkshire Hathaway, recently paid $4 billion to purchase Israeli metalworking firm Iscar.
Mr. Buffet expressly stated that he made the purchase because Iscar had a low valuation, generous cash flow, and generated almost all of its income from non-dollar sources!
So, how can you practice what Mr. Buffett preaches?
In short, we think a non-dollar-denomina ted investment portfolio will be the deciding factor in maintaining your current lifestyle.
Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
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