What faddish bit of investing "wisdom" was exposed as nonwisdom in 1997? Easy. For years, financial planners have been saying that it is indispensable for ordinary Americans to invest all over the planet. They dressed up the argument with attractive pie charts -- so slick you almost forgot they were talking about putting your money in markets you knew nothing about.
Thanks to these experts, people committed hari-kari in Japanese stocks (off 25% this year), not to mention Singapore's (down 40%) and even South Korea's (down 60%). And no sooner did the magnitude of Asia's collapse become clear than the consultants were proclaiming that their money-losing global-allocation strategy was as sound as ever. Typical is John Bowen, a financial planner with Reinhardt Werba Bowen in San Jose, Calif., who advises clients to put half the money that they have in stocks outside the U.S. -- about 25% in the Pacific Rim alone.
Mr. Bowen doesn't profess to have an opinion on whether Asia will go up or down. He merely thinks you should be there, and in amounts a robot could figure. Indeed, Mr. Bowen, who calls Asia's collapse a "gut check," concedes that he doesn't understand foreign businesses as well as those in Silicon Valley. "The nice thing is you really don't have to" understand them, he adds. "You can take the aggregate judgments" that are built into stock prices around the world.
Thus, the "sound" investor is defined as one who has moved a goodly chunk of his money out of the society he knows to countries with which he is unfamiliar, each according to their market weights. Indeed, not to put assets in such terra incognita is deemed to be "unsound." More than one so-called expert has recoiled with horror at the news that my own family is geographically undiversified. We have no money in the former Yugoslavia, none in the present Argentina, none in the future Republic of Antarctica, none in Zambia, Belgium, or Kazakstan.
None of these experts has a bulb so dim that cannot recite that as Asia's collapse was unexpected, so may be the next region's boom. This is like saying that because you never know which lottery ticket will hit, you should buy them all. To be sure, gambling on every country is wiser than gambling on one. But not gambling at all is wiser still. Meaning that investing in selected securities that meet a price and value test is to my mind safer than treating your portfolio like a food fair.
It is, of course, possible to intelligently invest overseas. There may be good values in Asia right now, perhaps very good. If you have the knowledge of local markets to find the underpriced bank in Tokyo, the undervalued retailer in Jakarta, more power to you. With American stocks high, it may well be that better values exist somewhere else. But unless you can find them -- meaning both the country and the stocks, and with a high degree of certainty -- you are gambling. Remember, there are other alternatives to Gillette and IBM, including Treasurys.
And the burden of proof should be higher away from home. For one, familiarity is an investor's ally. For another, while capitalism is revered in the U.S., it is fragile in many other parts. Disclosure is poor, currencies are risky and the shareholder in New Delhi or even in Amsterdam doesn't have the paramount place in law and in culture that he holds in Kansas City.
Some investors can surmount these obstacles and find superior values in foreign markets; that's fine. Some can find them in Silicon Valley; it doesn't mean you should blindly buy every tech stock. The difference between finding an undervalued societe in France and deciding in advance to allocate cash to the Paris Bourse is night and day. And the latter is what planners are pushing. The investment experts' trick is ever to split the universe into categories and then to offer supposed expertise on the proper division of assets.
Alas, profits don't accrue to categories; they are earned, singly, by companies. If you or your manager can spot them -- again, fine. But many "global funds" aren't really bottom-up stock pickers. Rather, they subscribe to the allocators' myth that you have to be in every country every day. And as little as I like throwing money at a U.S. index, throwing it at a global index -- thereby letting speculators in 86 foreign markets apportion my funds -- I like a lot less.
Mr. Bowen points out that when America is down, someone else will be up. But for people investing for their retirements, it is long-term security that matters. The fact that in various years, months, minutes, etc., the Standard & Poor's 500 will trail the Hang Seng Index is a daunting irrelevancy.
Moreover, the notion that the U.S. offers insufficient opportunity to diversify is absurd. Its economy is stupefyingly diverse -- across region, industry, size, raw-material needs, level of technology. Many American companies are themselves global. Of course, if America were to plunge into a decades-long depression, its markets would suffer near-permanent harm, though presumably, most others would, too. Apocalypses aside, it hardly follows that the long-term investor need put shillings in Somalia, or that doing so would make his portfolio "safer." To the contrary, you can lead a happy investment life without leaving home.