Rational Investing: Proper diversification key to portfolio management

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The umbrella was a Christmas present I received a few years ago from my wife's Aunt Pat. |ret||ret||tab|

It was the free gift that she received with the purchase of Aramis cologne for her husband, so she used it to check my name off her Christmas list. |ret||ret||tab|

It has done its part in fulfilling its designed advertising purpose for the fragrance manufacturer, has kept me reasonably dry on several occasions when I was prescient enough to have it in the car rather than the trunk, and now is functioning as an intro to this column on why portfolios should hold positions in international investments.|ret||ret||tab|

This morning I carried it with me, angling it against the door on the passenger's side of the car, and began my drive to the office, my mind struggling with how best to introduce the subject of international investing. |ret||ret||tab|

Duh! It hit methe umbrellas and sunglasses analogy, something we have used for years when discussing non-correlated assets.|ret||ret||tab|

If you own a store that sells only umbrellas, business booms on rainy days, but enough sunny days and you could go bankrupt. You want to mitigate that risk, so you add sunglasses. Now sunny days provide a sales opportunity you didn't have before. You have used non-correlated assets to smooth out the ups and downs you would have if you had limited your store to selling only umbrellas.|ret||ret||tab|

So it is with asset allocation: a properly diversified portfolio consisting of investments that mitigate risk by having little, if any, correlation with each other (for example, large-cap growth stocks relative to small-cap value stocks).|ret||ret||tab|

One of the asset classes investors frequently do not have represented in their portfolios is foreign (non-domestic) equities. |ret||ret||tab|

Some investors believe they have the correct foreign representation because they own a mutual fund with the word "international" in the name.|ret||ret||tab|

So let's make a distinction between international, global and foreign, because it is foreign investments that we want in order to establish the non-correlation of the asset to United States holdings. |ret||ret||tab|

International by definition simply means "of two or more nations." Those two or more nations can, and often do, include the United States, as could be the case in the use of the name "global," as it refers to world-wide.|ret||ret||tab|

If your intent is (as we believe it should be) to have non-United States holdings as a part of your asset allocation (approximately 7.5 percent for an investor with a moderately conservative risk tolerance), then do your research to make certain that the funds(s) you hold, or wish to acquire, for that category are non-domestic. (One fund we recently examined had "Global" in its name, but of its top 10 holdings, eight were United States companies representing approximately 20 percent of the total portfolio.) Check with your financial professional or review the fund's holdings on Yahoo! or one of the other Internet financial sites. |ret||ret||tab|

Most mutual-fund families now offer funds designed specifically to hold securities of non-domestic companies; some have further narrowed their scope to particular countries and/or size.|ret||ret||tab|

While you are doing your homework on foreign stock ownership, familiarize yourself not only with open-ended mutual funds, but also with American Depositary Receipts, which are traded on U.S. exchanges and represent ownership of foreign companies; closed-end funds that are also traded on the exchanges, some of which are country-specific and sell at a discount to the value of their underlying portfolios; and Exchange Traded Funds, relatively new vehicles that are style, industry, and country specific and have several features not found in the other funds. ETSs are our favorite way to "fine tune" foreign investment representation.|ret||ret||tab|

We encourage you to not overlook allocating a portion of your portfolio to foreign investments to a degree consistent with the risk tolerance you have established. |ret||ret||tab|

International economic growth and the attendant potential in foreign investments may well exceed that of the United States over the next several years. It is that possibility and the risk-mitigating factor of non-correlated assets that will help out when the umbrellas aren't selling. |ret||ret||tab|

|bold_on|(Clark Davis is a 30-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money management company. Questions or comments can be directed to him by mail via The Springfield Business Journal, 313 Park Central West, 65806 or by e|bold_on|-mail at sbj@sbj.net.)|ret||ret||tab|

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