EPISODE · Mar 11, 2014 · 46 MIN
013- International Investing
from Financially Empowering Women · host Baron Financial Group
Today’s show is focused on international investing. While many investors have been shying away from investing in Europe and Emerging Markets, a well-diversified portfolio will have international investments that go beyond today’s news. Our guest today is Bill Chisholm from Thornburg Investment Management who helps us understand why international investments are important. Over the past 10 years, international investments have outperformed the US market, as measured by the S&P 500, 7 out of 10 times International equities represent more than half of the world’s market capitalization. That has changed over the years. When we look at performance, the US market, international developed markets and the international emerging markets, all have very different patterns of return. In statistical jargon, they are all weakly correlated, so by including them together in a portfolio, an investor can improve their dollar return over the long-run by smoothing out volatility. Most people don’t realize that volatility cuts into the amount of money you earn. When people say they achieved an average 8% return, I always ask them, “with what level of volatility”, since the return percentage is only part of the story. Most people don’t look at the full picture, but volatility will cut into the actual dollars that you earn. Volatility matters a great deal. This is a hard concept for people to understand, but it is fundamental to investing responsibly. We also explain the difference between passive and active management. Active management is where a fund manager actively chooses stocks to hold in their fund. You pay higher expenses for active management. However, many fund managers don’t really add value; they simply follow the benchmark, so after fees, they underperform the benchmark. Passive management is simply investing in an index, such as the MSCI EAFE, either in an index fund or an ETF (we spoke a bit about ETFs last show). However, active management can be beneficial. Cremers and Petajisto’s 2009 study showed that there are a handful of actively managed mutual fund managers who are able to beat the market, after their fees. Their study rocked the academic and investment world. The problem is that the average investor doesn’t know how to find these funds, which is why I often recommend that most people stick with an index or ETFs. If you have the tools and the skill or you are working with an investment professional, you want to look for active management with a high active share, which has the potential to beat the benchmark.
What this episode covers
Today’s show is focused on international investing. While many investors have been shying away from investing in Europe and Emerging Markets, a well-diversified portfolio will have international investments that go beyond today’s news. Our guest today is Bill Chisholm from Thornburg Investment Management who helps us understand why international investments are important. Over the past 10 years, international investments have outperformed the US market, as measured by the S&P 500, 7 out of 10 times International equities represent more than half of the world’s market capitalization. That has changed over the years. When we look at performance, the US market, international developed markets and the international emerging markets, all have very different patterns of return. In statistical jargon, they are all weakly correlated, so by including them together in a portfolio, an investor can improve their dollar return over the long-run by smoothing out volatility. Most people don’t realize that volatility cuts into the amount of money you earn. When people say they achieved an average 8% return, I always ask them, “with what level of volatility”, since the return percentage is only part of the story. Most people don’t look at the full picture, but volatility will cut into the actual dollars that you earn. Volatility matters a great deal. This is a hard concept for people to understand, but it is fundamental to investing responsibly. We also explain the difference between passive and active management. Active management is where a fund manager actively chooses stocks to hold in their fund. You pay higher expenses for active management. However, many fund managers don’t really add value; they simply follow the benchmark, so after fees, they underperform the benchmark. Passive management is simply investing in an index, such as the MSCI EAFE, either in an index fund or an ETF (we spoke a bit about ETFs last show). However, active management can be beneficial. Cremers and Petajisto’s 2009 study showed that there are a handful of actively managed mutual fund managers who are able to beat the market, after their fees. Their study rocked the academic and investment world. The problem is that the average investor doesn’t know how to find these funds, which is why I often recommend that most people stick with an index or ETFs. If you have the tools and the skill or you are working with an investment professional, you want to look for active management with a high active share, which has the potential to beat the benchmark.
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013- International Investing
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