Canto 7

International investing

No matter where you live, the capital markets in your country account for less than half of the world's total. The US has the largest share of the world's stocks and bonds, and it's just over a third. Most people believe that it's important to have some of your investments in countries other than your own, just in case your country's economy doesn't do very well and other countries do better. I think that's true, and it's probably more true for people who live in countries with smaller markets.

How big are the markets in different parts of the world?

Here are some examples of what percentage of the world's stocks and bonds are in different parts of the world:

• The G20 (essentially the 20 largest economies in the world) account for 84% of the world's capital markets
• North America accounts for 40%. There are three North American countries with capital markets and they are all part of the G20. The US is 36% of the world's total and Canada is 4%. Mexico is 1%. (There is some roundoff error in these numbers).
• East Asia accounts for 22%. China and Japan are each about 7% of that. Hong Kong and South Korea are each about 2%. Malaysia and Indonesia are both under 1%. Countries in East Asia that are also members of the G20 account for 17% of the world's markets.
• Western Europe also accounts for 22%. The UK is about 6%, France and Germany are each about 3%, Switzerland and Spain are each about 2%, and Netherlands, Sweden, Italy, Turkey and Belgium are about 1% each. Countries in Western Europe that are also members of the G20 account for 15% of the world's markets.
• The whole rest of the world is only 16% of the world's total markets. 4% are in South America, 3% each in Oceania and South Asia, 2% each in the former USSR and Middle East/North Africa, and 1% each in Eastern Europe and Sub-Saharan Africa. There are G20 countries scattered about in most of those regions. Australia, India, Brazil, and Russia are each about 2% of the world's total. South Africa and Saudia Arabia are each about 1%.

Principles you might want to consider

• Diversifying among countries has some of the same advantages as any other kind of diversification or asset allocation. You reduce the risk of bad performance in one stock market affecting your ability to reach your goals, you smooth out the growth curve in your investments, and if you use an asset allocation approach you'll be encouraged to buy low and sell high in the various markets where you put your money.
• You should probably invest more in your home country's markets than its percentage of the world markets, for a few reasons. You will probably end up spending the money in your home country, and you don't want to risk having your foreign investments shrink in value because your home country's currency shoots up before you need the money. You also probably want your country's economy to do well, and investing in your home markets is a way of helping with that. Your government probably provides some tax incentives to investing in your own country. Finally, you get voting rights in the companies you invest in if you buy stocks, and you could potentially have a small influence over what those companies do in your country.
• Just as with the other categories of assets, investors expect higher returns when they take more risk. For that reason, most people expect the markets in smaller countries to outperform those in large countries. The emerging market economies only account for 16% of the total, but some people choose to put more than that into them, particularly if they are saving for a very long-term objective and willing to take on a lot of risk. That's fair enough, but as the time when you need the money approaches, you should retreat to safer markets.
• I think some people invest in emerging markets because they think that's a good way to help poor countries grow their economies faster, which will help the people who live there. I suspect that's not as good a way of helping as things like Kiva.
• In our investments, we have included both international stock funds and international bond funds, so we're actually diversifying internationally in both categories. We have been pretty uninspired by the performance of the international bond funds. I'm not sure they're worth the trouble. I suppose if you were diversifying your cash internationally, you'd just be investing in the currency of another country or putting money in a bank account there. That's probably more trouble than it's worth, unless you need an account there for some other reason. I think the highest priority is to diversify your stock holdings internationally.

How to invest internationally

I think it is pretty difficult to invest in individual stocks traded on the exchanges of other countries, with a few exceptions. I think a Canadian can buy US stocks through a Canadian brokerage, for example. In general, though, I think it's a lot easier to do your international investing using mutual funds or ETFs.

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