A Little Contrarianism Can Be a Good Thing

In our most recent quarterly letter, we reiterated our belief that you should allocate 15-25 percent of your equities portfolio to international stocks. Some of our clients still question the logic of this position in light of the ongoing EU crisis. However, let me make a case for contrarianism.

While the pall hanging over Europe has worsened in the last few years, things have not been rosy for a long time. According to June 2, 2012 article published by The Economist (http://www.economist.com/node/21556299 ):

Robert Buckland, an equity strategist at Citigroup, points out that about 44% of pan-European corporate profits are generated outside Europe (British companies earn 52% of their profits outside the continent). Around 24% of European profits come from emerging markets, roughly double the exposure of American companies to the developing world.

This diversification is not a coincidence. European companies have already endured a decade of sluggish growth and have sought out markets elsewhere (for production as well as sales).”

This indicates that worsening conditions in Europe will compel European companies to expand even further into the global economy. And, our dividend yield loving clients have another good reason not to flee European investments. While the average dividend yield for American markets is 2.2%, European markets are yielding 4.1%.

Beyond Europe, emerging markets continue to provide opportunities for investment. Mongolia is enjoying a rapidly expanding economy thanks to a boom in coal and copper mining. The Arab spring has led some analysts to predict major growth in Libya. A return to oil production and distribution is giving Iraq’s economy a much needed shot in the arm. Additionally, economists see much opportunity for growth in Africa, with several countries expected to post growth rates in excess of 7.5%.

I am not suggesting that European markets have hit bottom or that you should put all of your international investment dollars in emerging markets. What I do espouse is that a well diversified portfolio for the long-term investor has some exposure to international equities, even when the headlines indicate otherwise.

Tracy H. Allen, CFP®

Financial Advisor

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Scared Money Don’t Make Money

Recently, I heard the above phrase in a rap song by Pitbull.  I was surprised to hear mention of investment risk/reward in a popular song.  He did not go on to discuss European economic instability or currency valuation.  That would have been truly shocking.

The statement provokes thought, though.  People who are willing to take the most risk have the potential for greater reward – and greater loss.  It is easy to have an asset allocation of 100 percent equities in an up market.  Can you keep that allocation when the market is significantly down?  Will you still sleep at night?

On the other hand, holding money in a money market fund earning near-zero interest is also a risky proposition.  You must find some vehicle in which to invest because you cannot afford to earn nothing for your money.  Inflation continues to rise, even when interest rates are not.  The dollar you stash in a mattress will not be worth the same 10 years from now as it is today.

Finding the right allocation is very tricky.  It requires a great deal of evaluation on your part.  What is your current age?  Do you have enough time to recover from a short-term loss?  What are your investment goals for the next 5, 10, 15 years?  When do you want to retire? 

This is just a sample of some of the questions you should ask yourself.  A thoughtful review of your situation with your investment advisor will help the two of you to determine the best asset allocation.  Being brutally honest with yourself and communicating your goals, thoughts, and concerns with your investment advisor will allow you to work as a team.  The two of you will be able to find the right allocation that can help you sleep a little better at night.

Cristy Freeman, AAMS
Senior Operations Associate

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