Expert: Paul Henneman - 2/8/2011

Question
Hello Paul,
First off, I wanted to say that you are an absolute Saint for spending the time to help people like this.
Thank you for sharing your knowledge.

I'm a lucky person I guess, I'm 25 and my grandparents gave me a $25,000 trust fund about 15 years ago. After being neglected for over a decade, my Mom got ahold of it and put $5,000 in Apple which has been a big boost. Now I have about $35,000 in the account.

I'd like to think of it as a retirement account, hopefully I won't need to take anything out anytime soon. Right now it is well diversified in the US.

Given the fundamentals, I was thinking that emerging economies might be a great investment too. According to Fareed Zakaria's 'The Post American World,' Goldmann Sachs predicts that by 2050, BRIC + Mexico will have more economic output than the original G7.

I see how even Admiral Mullen is warning that our debt is a National Security threat, as our interest payments alone might be more than Defense by 2020. Of course, China is becoming our bank as they hold onto 2 trillion dollars in reserves.

Here is my question...

If I was going to keep my money sitting somewhere for 30 years, why wouldn't I want it to be in China? Shouldn't I put at least 20 to 25% of my investments in a China mutual fund? Some Indian and Brazilian stocks would be nice too.  

I was thinking about buying stock in some of the best performing stocks in most every major sector, from cell phones to energy to food. Do you think that would be a good idea, would it be an aggressive move?

Are there a lot of people that lost their shirts when they made the same bet on Japan in the 80's?

Thanks for your time, hope I didn't bloviate for too long.

Jay

Answer
Thank you for your question!

First, congratulations on using your trust fund as an investment, to invest rather then spend! This will treat you very well.

Everything you say sounds fine.  You are thinking in terms of diversity, which is exactly what you should do.  The only caution I would suggest would be how much you put into China and international stocks. While I agree about the potential of these areas, things change over time.  Often things can change quickly and unexpectedly. You mention 20 to 25% of your investments in China.  If you feel very, very strongly about the future of the companies that trade publicly in China, that is fine. But do realize that is a VERY high percentage of your investments to put into one region.
Typically, a high percentage of international exposure would be 20% total, of which China would only be a part of that.  Times are changing, and the long term outlook of the US economy is certainly not what it once was.  So perhaps investors should rethink what qualifies as an adequate amount of international exposure.  But anything over 30 or 40% internationally would by any measure be a huge portion of your portfolio of investments.

The problem with international stocks and funds are that most regions of the world are less stable than the US and can change quickly (like Egypt), they have far less accounting and legal structures to ensure that the information you receive is accurate, and most foreign companies that you will be able to invest in will be tradeable on US exchanges (meaning they do exhibit trends similar to US stocks in some respects, reducing the diversity you are seeking by investing in international areas).

To sum up: you have done your homework.  Do what you are comfortable with. If you are looking for long term investments that will not require much attention, international investments can be risky. Your example of Japan in the 80's is a good one. So much promise, but their stock markets have been stagnant for decades.  Other areas (such as South America) regularly go through boom and bust period.  Every boom period is announced as somehow 'different' and sustainable, but inevitably the next bust comes around. if you are willing to take on some risk, international would be of interest. But make sure you have significant investments in safer things as well.

Best Regards,
Paul