Alan Moore, founder of Serenity Financial Consulting, LLP, says that if there’s anything risky about international investing, it’s not doing it as part of portfolio diversification.
An academic background and a master’s degree in financial planning taught him a lot about modern portfolio theory, among other things. “[MPT is] the first time anybody ever suggested that diversification is a good thing,” he said, and global diversification is not only part of that theory, not doing it doesn’t seem reasonable. In fact, it’s the “only free lunch that really exists.”
What does Moore mean by that? That “different asset classes and countries, across different industries and sectors, either will increase client return or decrease risk for the same amount of return.” It just doesn’t make sense, he says, not to do it, particularly when you consider how risky investing only in the U.S. can be. “Sequesters, the debt ceiling crisis—the U.S. market can really take a hit. I don’t want [to invest for clients] based solely on what the U.S. is doing,” he said.
Moore’s client portfolios are invested roughly 50/50: about half in the U.S. and about half elsewhere, with the bulk of the elsewhere going into developed markets but with emerging markets also making up part of the allocation. He relies on mutual funds to provide international diversification for client accounts, rather than buying individual equities or seeking out particular country weightings. That provides “exposure to about 20,000 different companies, which is about as diversified as I know how to get,” he said.
Moore looks for investment managers that “buy the market basket,” so that each client’s portfolio has about the same exposure to those 20,000 or so stocks across the globe and also has a “pretty low” expense ratio. He also said he regularly rebalances client portfolios, so that when one sector outperforms, its gains are harvested. That presents opportunities to lock in profits and buy undervalued sectors. “That ability to rebalance is huge, and having those international stocks increases our ability to do that,” he said.
Moore has been doing international investing since he started as a planner, even before he founded his firm, both for himself and for his clients. He believes that “markets are largely efficient and stock prices are set appropriately, and it’s impossible to beat the market,” so he uses passive investing, does not try to time the market and is happy to rely on those mutual fund managers to provide the diversification he seeks—though he does say that a bit more exposure to China would not come amiss because it represents such a large portion of the world’s wealth. Its markets being what they are, making access difficult, he says that sometimes clients are a bit underweighted in China.
That said, Moore said that his investment strategy is not about favoring any country. Instead, it’s “about having your rationale, having your plan and reasons for the plan, and sticking to it.” Financial planning is as much art as it is science, he says, with no single right way to do it, and “there’s no perfect percentage in anything. It comes down to a lot of personal opinion.”