Christopher Olsen of Olsen and Associates has been doing international investing for a long time. “Maybe 20 years ago we started using Allocation Master software, based on Nobel Prize-winning diversification theory,” he said. The software “tells me how much is going into various categories, and international is one of them. I pretty well stick with that.”
“The bulk of [what I use] is diversified international funds, not U.S.,” Olsen said. Early on he “used to find ‘international’ funds that had 80% [invested in the] U.S.,” with the rest invested in Mexico and Canada, “and they called themselves an international fund.”
Finding true international funds used to be one of his biggest challenges in those early days. In fact, he “got burned in ’99 because the mutual funds touted [themselves as] international, and we didn’t have as good tools in ’99 [to do the research].” When the market went down that year, he learned that the fund he was using “mirrored the NASDAQ almost perfectly, and had lots of tech companies—Cisco, IBM—and said [to justify those companies’ presence], ‘They all sell internationally.’” Diversification, he said, “is more important than trying to pick a certain sector.”
Now, however, the job is easier, and true international funds provide that diversification for his clients, both in stocks and bonds. While he doesn’t favor one region or country over another, emerging markets have provided some boosts to client portfolios as the Allocation Master software steered him in that direction. “For the last few years, when we went through the ‘Greece is going to leave the Euro’ [period], my models called for adding to international, which I did.” And clients have been pleased with the results.
Of course, just because he gets clients invested in the right areas doesn’t mean that the way is smooth sailing. There’s always the emotional factor that can kick in even when the news is good. He told of one client who had made a considerable amount in emerging markets during the recession, when U.S. markets were tanking.
“She needed money for something,” he said, and sold off some of her investments.” Of course that left her open to taxes on capital gains—something she had not considered. In June or July of 2011, he said, she e-mailed him to say “she was upset; she had such huge gains on emerging markets that when she did her taxes she owed a bunch of money.” She hadn’t been upset at the “risk” of international investing, but the “loss” to taxes of some of what she made bothered her.
That’s not the only kind of emotion to intrude. Interestingly, while many of his clients want to avoid risk altogether, some of his elderly clients actually have an appetite for risk. “I had a cycle of investing where [my clients’ reaction] was more emotional, as opposed to financial,” he said; “when [the market is] higher they’re euphoric, and when it’s low they’re scared.”
One of those clients, an 88-year-old woman, “had an annuity with a death benefit guarantee, and she had bonds and conservative things [as investment elections]. She had $150,000 in there, and [I told her,] ‘If you get aggressive with this and you lose, and die, [your beneficiaries] still get the death benefit. But if it goes higher, you get that [higher return].’ She said, ‘Which is riskiest?’”
The client went into emerging markets, and “I documented for compliance a lot,” Olsen said. “She made like $100,000 on the $150,000 in just about a year,” he said. “I told her, ‘You have $250,000, and now you need to reduce the risk,’ and she said, ‘No, I don’t want to reduce the risk; this is fun.’ Her son comes in in September, and he says, “You’ve got my 88-year-old mother [in this?]’ She[finally] reduced her risk, and now emerging markets are not in favor, but she captured all her gains.”
A few other clients got the bit in their teeth during 2008 to 2011, as models called for buying international while it was down. Even his mother, who Olsen said is “very risk averse,” saw the possibilities. And one couple, who had at first been ready to exit the market in 2008 when losses were so large, instead opted to buy emerging markets to “take a little more risk when things are down … [The husband] just happened to make his decisions [to buy] on days when things really dipped. They had, a year later, a huge amount in emerging markets, and she wanted cash and he wanted to keep the risk … I had a hard time getting them to veer away from risk.”
But in general, “there’s not a lot of emotional debate” when it comes time to rebalance. With so many buying opportunities abroad, many clients have ended up overweight in international and now Olsen is rebalancing. “The models provide me diversification, and clients know we’re going to do that,” he said.
While not all his clients have international diversification in their portfolios, “maybe 95%” do, “and the amount varies based on how much risk they’re willing or need to take.” The amount ranges from a low of around 2% for the very risk averse to “maybe 10%–12%” for those who aren’t so cautious. Interestingly, while some of his older clients are not opposed to risk, some “40-year-olds don’t want to have any risk at all” and some of the really risk averse may have up to 40% in Treasuries. His pre-retirement clients may have around 8% in international. Clients may also have up to around 10% in international bonds.
The wild ride of 2008–2011 notwithstanding, when the models kept indicating diversification into international, Olsen has listened, and intends to keep doing so. “I’m a big proponent of diversification. So for a one- or two- or three-year period I’m not going to change my strategy, [which is] very long term, and try to second-guess and decide when it all changes on a dime.” Timing, to Olsen, isn’t everything; diversification is.