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A Word on International Funds
When you invest outside of the U.S., the costs are higher as a result of currency conversions, trust procedures for foreign investments, analysts capable of understanding foreign accounting rules, and a host of other things. Although high, it is not unusual for an international equity fund to have an expense ratio of 2%. Why do some investors bother owning international funds? In the past, stocks of foreign countries have shown low-correlation with those in the United States. When constructing portfolios designed to build wealth over time, the theory is that these shares arenít as likely to be hit hard when the American equities are crashing and visa versa.
First, if you are going to venture into the international equity market by owning a fund, you should probably only own those that invest in established markets such as Japan, Great Britain, Germany, Brazil, and other stable countries. The alternatives are emerging markets which pose far greater political and economic risk. The economic basis for digging a gold mine in the Congo might be stable, but there is nothing stopping an armed military group from kicking you out the day your work is finished, reaping all of the rewards for themselves.
Second, virtually all international funds chose to remain unhedged. This means that you are exposed to fluctuations in the currency market. Your stocks, in other words, could go up 20% but if the dollar falls 30% against the yen, you may experience a 10% loss (the opposite is also true.) Trying to play the currency market is pure speculation as you cannot accurately predict with any reasonable certainty the future of the British pound. Thatís why I personally prefer the Tweedy Browne Global Value fund which hedges its exposure, protecting investors against currency fluctuations. Even better, itís expense ratio is a very reasonable 1.38%.
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