Don’t let the Greek ﬁnancial crisis talk you out of investing abroad —there’s still plenty of opportunity to be had.
Are you suffering from ‘Home Bias’? Only investing in stock markets that are familiar to you? Historically it’s been hard and expensive to invest in international markets, but there are many advantages to being invested in foreign equity markets. Are you missing out on the opportunities because of old myths?
Today it’s possible to make international investments with the tap of your ﬁnger on your phone. This can be done for the same cost as buying domestic shares, and yet this simple fact is still widely unknown. One common myth is that global shares are expensive to purchase: the good news is that many lowcost international brokers are changing this trend.
Individual global investors can now get access to opportunities that were out of reach a decade ago. So how do you choose what to invest in once you realise you can access the global markets?
Historically one of the best investments has been what’s called a ‘Stock Index’. An index represents a basket of stocks, the most famous being the Dow Jones Index. Imagine 30 stocks all mixed together to represent one number. An index gives us a snapshot of what the market is doing as a whole. There are many types of indices that represent different markets: the S&P 500 represents the top 500 companies in America, the Nikkei 225 represents the top 225 stocks in Japan, and the Euro Stoxx 50 represents the top 50 stocks in Europe.
In Jeremy Sigel’s now infamous book Stocks for the Long Run he showed that indices, like the ones I mentioned, produced an annual return of 6.8 per cent (after inﬂation!) from 1871-2001. Our human mind cannot intuitively understand compound rates. So let me ask you this: if you started out with $10,000 and each month you deposit $500 into an account and this account magically compounds at 6.8 per cent, how much will you have if you keep this up for 30 years? About $620,000!
You can see why you need to tap into this power of long-term stock returns. However, because of past crises, the tech bubble, the GFC, and the European debt crisis, stocks are still not a popular investment. In fact, these periods of uncertainty have historically been a great time to invest for the long term because people forget the cyclical nature of the markets. If you pay attention, opportunities will arise for astute global investors.
So how does one invest in a stock index? An index is a mathematical construct, so it cannot be invested in directly. One can buy an ETF (Exchange Traded Fund), which attempts to track a particular index. This can be bought just like a stock.
One of the great advantages of an ETF is that the fees are extremely low. The fees are usually built into the ETF itself, so one does have to be careful which ETF they purchase.
According to ETF.com, the average U.S. equity mutual fund charges 1.42 percent in annual expenses. The average Equity ETF charges just 0.53 percent, and I have seen much lower. They may seem like small numbers, but compounded over time they make a huge difference.
Buying an ETF to track the broad market might sound pretty boring. You might think that you can pick your own stocks and do better—but most professionals can’t even do that.
According to Vanguard from 1984 to 1998, only 8 out of 200 fund managers beat the Vanguard 500 index.
The funds management industry doesn’t want you to know this information. You can buy a low-cost index, achieve global diversiﬁcation, pay a minimal fee, and then outperform the majority of actively managed funds! All from your phone or device. You can see why Warren Buffet is leaving 95 percent of his wealth in a stock index, as per his will.
One index most likely to perform well over the long term is the Euro Stoxx 50. It’s an Index that tracks the top 50 stocks in Europe. But isn’t Europe about to fall apart? Rest assured that these are large multinational conglomerates, whose revenues are not relying on Greece to get their act together.
In fact you probably provide many of these companies with part of their revenues. You may have started your day with a Phillips shaver, or used some makeup from L’Oréal, cleaned your clothes with Unilever washing powder (they own over 1,000 brands), checked your bank account with ING, drove your Volkswagen, which is insured by Allianz, ﬂown on an Airbus aircraft (also insured by Allianz), which use Deutsche Telekom for their phone services, total for their aviation fuel and Bayer for their cleaning products. Not so foreign anymore! Still think Greece leaving the Euro is going to bankrupt all of these companies?
These are quality companies that are currently representing value because of the recent market turmoil. Unlike the U.S., Europe’s stock market has yet to reach its previous highs from before the GFC.
By purchasing an ETF tracker you will be getting a slice of all these companies. You move from consumer to proprietor: it’s a simple yet powerful strategy.
The best global investors take opportunities that remain largely unseen to others. They also know that diverse investing is key. The success that I have achieved has not only come from the ﬁnancial but also the educational
investments I have made. When I started my company Right Path, I joined Australia’s largest community of entrepreneurs, The Entourage, because I knew that I needed to diversify my investing back into myself.
That is what Right Path is all about. Teaching busy people simple strategies to set them up for ﬁnancial success. We do this in a transparent and independent way by revealing what we are buying and selling in real time. Right Path launched earlier this year. We are a growing community of independent global investors passionate about wealth building, and becoming a better person in the process.
The secret to achieving any success in life is a commitment to ongoing education. Joining The Entourage has helped me to think like a proprietor, just as Right Path helps you think like a world-class global investor.
Nick Thorne is Co-founder of Right Path. Mentored by a fund manager from a young age, Nick is an independent trader managing his entire family wealth. He has learnt how to make money in the markets through his own experiences and independent courses. As a trading coach he specialises in giving actionable information that leads to successful results in the markets. He has a love for reading and teaching others the art of trading. www.rightpathinvesting.com