Keeping The U.S. In Perspective

They say there’s no place like home, and for most American investors, our domestic markets have created handsome returns over the years. But the tides are turning and foreign markets are presenting great opportunities. The average annual return over the last 5 years for foreign developed countries (EFA) was 18% versus 10.5% in the U.S. (SPY). The 3-year average annual return of emerging-market countries (EEM) was over 36% per year. Investors are obviously eager to participate in these returns. In fact, for the week ending May 16th, 2007, only 10% of the money flowing into equity mutual funds went to those that invest primarily in the U.S. Over 90% of the money invested that week went into equity mutual funds focused outside the U.S.

After looking at the facts above, some might conclude that they need to increase their exposure to overseas markets. But how should you do it? Should you find an equity fund that invests in a number of foreign markets, or find one that caters to just a single country, or niche within a country? Or are there better ways to capitalize on foreign growth that have a greater chance of providing superior returns?

Understanding world trends in population, domestic product and annual incomes will go a long way to answering these questions. It’s estimated that there are around 6 billion people in the world. Roughly 300 million people live in the United States. So only 5% of the world’s population lives in the U.S.! 95% of people live in foreign countries. There are 1.3 billion people in China and 1.1 billion in India alone.

America still leads the world as measured by the goods and services it produces (GDP) each year. We produce $13 trillion. Still, we only produce about one quarter of the world’s GDP and that percentage is only going to decline. China’s GDP is $10 trillion, India’s is $4 trillion.

We are also near the top (#3) based on annual income. The average American brings in $42,000 a year. China is ranked 105th at $6790 per person. India is ranked 146th at only $3420 per person. These are considerable gaps!

We don’t just want to know where things are today; we want to know where they’re expected to go in the future. From an investment perspective, we will have a better chance increasing our wealth by investing where the growth is.

The population growth rate in America is declining, and has been since 1950. It’s estimated that it will decline 32% between 1950 and 2050. That means that the rest of the world’s population is growing faster.

It’s likely what foreign countries produce will grow faster as well because they are starting from a much lower base. It is going to be easier for China to increase their GDP by 50% than it will be for the U.S.

The population ‘bulges’ in China and India represent 350 million people with about 2/3rds of them under the age of 21 and 1/3 between the ages of 37-41. Talk about Boomers! We see dramatic affects in our economy as a result of the 44 million Baby Boomers. Multiply that by 7 times and you can imagine the impact it will have in those countries.

Life expectancies will increase. Education will improve; poverty will decline. The list can go on and on. I’ve mainly used China and India as examples, but there are many, many other countries that have similar growth trends. Larger populations mean more demand for electricity, fuel and infrastructure like bridges and roads. Many will need automobiles, homes, furniture, cell phones, etc.

So how should this affect how you invest? First, recognize the global trends underway. It’s my opinion that an investor can improve their return by focusing on specific opportunities as opposed to large international mutual funds or ETFs. Take the major trends I’ve mentioned and determine their impact at a micro level. What are the companies best poised to take advantage of that trend?

Major trends or themes can help you know how to position your portfolio. But you can’t base your decisions on one isolated theme. This global-growth trend is just one of the major investment themes that I use when investing my client’s portfolios. There are many others. We’ll look at another one next week.

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He’ll answer your financial question – FREE at www.guardingyourwealth.com.

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