International investments and growth

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Q. How can I pick the best international investments without taking on too much risk? I’m seven years from retirement but I know I need growth. And what markets are looking good these days?
— Need exposure

A. You’re correct that you will need growth, and not just heading into retirement.

Your portfolio will need some growth over the many years we hope you have after retirement, too.

One of the best ways to manage risk in any category of investing is to take a broadly diversified approach and avoid trying to pick the next best country or sector, said Jim Sonneborn, a certified financial planner with RegentAtlantic Capital in Morristown.

He said there’s a wide world out there beyond the U.S. borders with economies that are growing at different rates and in differing cycles.

Sonneborn said adding international stocks to a portfolio can be beneficial in providing potentially better risk adjusted returns, citing a recent Vanguard study that found the best bang for your buck in reducing portfolio risk comes from having between 20 to 40 percent of your stocks invested outside the U.S.

Sonneborn said investing for growth is important as you build a nest egg for retirement and also in the decades to come once past that desired date.

“Depending on your personal situation, you likely will not want to turn down the growth dial much once in retirement,” he said. “As we all are living longer it may be detrimental to become overly conservative when you still have many more years to live and will need to keep ahead of inflation.”

There are primarily two types of markets when looking at international investments: developed and emerging.

Chip Wieczorek, a certified financial planner and investment adviser with Tradition Capital Management in Summit, suggests allocating most of your international investments towards multinational companies in developed markets with limited or no direct exposure to emerging markets.

He said large-cap multinational corporations allow an investor to gain exposure to international economies and have the added diversification of a business that operates across several countries.

“These companies typically pay above average dividends and tend to increase their dividends every year,” he said. “Multinationals can also give you less volatile exposure to emerging market countries as demand for their products increases in those markets with an increasing middle class.”

For the foreseeable future, Wieczorek said, he’s heavily underweighting emerging markets.

“For those choosing to invest directly in emerging markets, I would only suggest using a non-country specific mutual fund,” he said.

Most emerging economies are very reliant on the production and exporting of commodities such as oil, copper and gold. In a weakening global economy, demand for these items will continue to stagnate, Wieczorek said, which will slow growth in their economies.

“Most emerging economies are heavily export driven for goods they manufacture for larger economies,” he said. “With U.S. growth expectations around 2 percent and Europe in the 1 percent range, those will be difficult markets in which to sell their exports.”

Wieczorek said investors must consider transparency and volatility.

As news of China’s unclear growth reports and opaque accounting practices come to fruition, investors are showing concern, he said, and the concern and uncertainty has caused increased volatility to that sector.

He said he’s not sure it’s worth it.

He said his firm’s long term return projection for domestic equities is 8 percent with a 14 percent volatility range, and the same projection for emerging markets is a 9.5 percent average return with a 23 percent volatility range.

Sonneborn said to stay broadly exposed to international economies, you can consider one-stop shopping with a mutual fund or exchange-traded fund (ETF) that invests in an index such as the MSCI All Country World Index Ex-USA, which captures exposure to all the major developed and developing countries across a wide spectrum of company size. He said this approach provides the dual benefits of casting a very wide investing net with the low cost approach of index funds.

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NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.