Offshore investing: spreading risk helps sleep

Written by Murray Priestley


The world’s economies still dance to different tunes and have different boom and bust cycles that tend to offset each other, even thoughrepparttar differences are getting smaller. As a result, international stocks can provide diversification for a portfolio heavy in U.S. stocks.

Between June 1997 and October 1998, for example, Japan’s Nikkei index lost almost 40%, but European markets did well due to continental economic union. U.S.-style corporate restructurings also began to pay off. One region’s success balancedrepparttar 100524 other’s failure to get its financial house in order.

There has been less divergence between regions more recently. Even so, we suggestrepparttar 100525 prudent investor cannot afford to ignore overseas markets. They now represent some 44% of world market capitalization, up from 25% about 30 years ago. International stocks can provide solid diversification for a portfolio heavily invested in U.S. equities.

Exchange rates add an extra flavor to foreign investments. Fluctuations can add to or detract from profits or losses. Institutional investors and others pay significant attention to this factor. Whenrepparttar 100526 U.S. dollar was appreciating againstrepparttar 100527 Japanese yen, billions of dollars flowed out of that country and into U.S. stocks and bonds, worseningrepparttar 100528 economic crisis in Japan. That money started to flow back out whenrepparttar 100529 currency valuation began to reverse. Americans saw their investments in Japan appreciate then, even whenrepparttar 100530 stocks remained in neutral.

Funds that invest overseas fall into four basic categories: world, international, emerging market and country specific. Diversification isrepparttar 100531 key to containing risk. And, yes, a good fund manager helps, too. Research is scarce and foreign companies, other than some in Canada, are difficult for individual investors to track on their own.

World funds arerepparttar 100532 most diverse ofrepparttar 100533 four categories. They are, asrepparttar 100534 name suggests, able to invest anywhere inrepparttar 100535 world, includingrepparttar 100536 U.S. As a result, they don’t offer as much diversification as a good international fund. Some have 60% or more of their holdings inrepparttar 100537 U.S.

The VCC Die-Off

Written by William Cate


The VCC Die-Off By William Cate

It's March, 2000. The DotCom Bubble has burst. Investors have lost billions of dollars. This isn'trepparttar first major investment mania to implode. There wasrepparttar 100516 Market Crash of 1929 andrepparttar 100517 Silver Collapse of 1893. In fact, hundreds of speculative investment failures can easily be traced back to Tulipmania in 1636.

All speculators believe that someone will take them out of their investment at a profit. Speculators focus upon how much money they will make in a deal and not on how likely they are to lose their risk capital. The speculators' perceptions can easily be manipulated. Manipulation potential is a fatal flaw. Markets fail because greater fools can't always be found.

The reason that greater fools can't be found is thatrepparttar 100518 reality ofrepparttar 100519 risks ofrepparttar 100520 speculation eventually overcomesrepparttar 100521 speculators' false perceptions. Is an Internet Startup Company, without revenues, worth a billion dollars? Is this company likely to have a balance sheet value that justifiesrepparttar 100522 billion-dollar market capitalization, given thatrepparttar 100523 odds are about one-in-one hundred that they will succeed? However, these questions aren't asked whilerepparttar 100524 speculators are in a feeding frenzy. It happens only afterrepparttar 100525 time when a shortage of greater fools causesrepparttar 100526 mania to end.

There were certainly winners inrepparttar 100527 Internet Speculation Mania, like Apple and Microsoft. But, for every winner there were over one hundred losers. Venture Capitalists and Angel investors have taken this one hundred to one odds against gamble for decades. They almost always lose over time. Usually, new speculative investors enteringrepparttar 100528 Market offsetrepparttar 100529 failure rate of past speculators, who departrepparttar 100530 Market poorer. The DotCom burst bubble reducedrepparttar 100531 gamblers enteringrepparttar 100532 market while increasingrepparttar 100533 percentage of short-term Venture Capitalist and Angel investor losers. The short-term failure rate lead to a major die-off of traditional Venture Capital Clubs (VCCs).

Traditional Venture Capital Clubs were a major source of risk capital. Membership was usually about equally divided between Accredited Investors, called Angels and principals of Venture Capital Firms. The Prime Directive forrepparttar 100534 Venture Capitalists at Club meetings was to recruit Angel investors as clients. Venture Capitalists are always seeking accredited investor clients. It's their source of money for their business gambles.

After World War II, VCC organizational structure was simple. The members paid a fee to attendrepparttar 100535 monthly meetings. The entrepreneurs paid a fee to offer their investment torepparttar 100536 membership at these monthly meetings. The members who invested in a project almost always lost their money. After losing money in two to four gambles,repparttar 100537 member dropped out ofrepparttar 100538 Club. Over time, new members became harder to find asrepparttar 100539 losers were pointing outrepparttar 100540 reality thatrepparttar 100541 speculations didn't prove profitable. Most ofrepparttar 100542 losers never understood why they lost their money. It wasn't evil entrepreneurs or crooked club organizers. It was probability theory. The odds are always against Venture Capitalists and Angel investors.

Cont'd on page 2 ==>
 
ImproveHomeLife.com © 2005
Terms of Use