Investing in a Global Economy
Investing in a Global Economy
The Motley Fool notes in an article that if you believe emerging markets will remain commodity-based oligarchies, then that may limit the amount of international investing you may want to do. However, if you believe emerging markets are entering a new era of rising consumer spending power, infrastructure development, and more diverse, sustainable development, then there are many profitable ways to invest (MotleyFool.com). After traveling abroad in college and graduate school I tend to believe in the second notion. I just look at what America has accomplished in the last 200 years.
I believe it is wise to start investing globally because many people have a fear of the unknown. As we learned on our international trip, the more you travel and become aware of different cultures and trends the more you are able to process the effects it has on different societies. Having knowledge of an emerging or international economy can become much less of a risky stock investment. You can hypothetically be deductively reasoning some of the risk out from your knowledge base of the culture or country.
Megan McArdle talks about different strategies in investing in her article "The Great Stock Myth." What she concludes after researching many different theories is that once everyone believes that the stock market or a stock offers high returns for relatively little risk, that notion stops being true. She goes on to say that financial markets have an interesting feature that has undone many a trading strategy. That is once everyone starts believing something, it often stops being true. If you discover an arbitrage opportunity-otherwise known as a "price anomaly" or "free money" it will be profitable only as long as few people knew about it. Once it is widely known, bidders will rush into the market until the discrepancy is traded away. After that happens, future returns will be lower (McArdle).
After learning how to navigate markets and discovering what investment strategy is right for you, then it is on to the last step before jumping in, which is timing. If you find a great stock, but jump in at the peak of the market you could find yourself starting off with a loss to come back from in the first couple months. The more time you have, the less you have to worry about the price you purchase the stock. If you feel the company is going to grow a lot over the next 10 to 20 years then your timing may not be as important. If you plan to swing trade a stock every several weeks, months or even years then you definitely have to take note of a good time to purchase the stock.
The last topic to review is when to sell your stocks. Many mutual fund investors are quick to withdraw their cash when returns turn south. However, several academic studies have proven that investors who jump from one fund to the next, chasing performance, tend to do vastly worse than those who stay put. If you have done your homework and look for a quality company in the appropriate emerging markets than you should be prepared to stick with a fund through good times and bad as a whole. Two major signs to sell a stock and not hold for the long term would be that the business's fundamentals have changed or the stock has become highly overvalued (MotleyFool.com).
Some analysts get very in depth with all the topics I have mentioned above and books have been written for each specific topic. The whole idea with stock timing is to know how long you have until you will really need the money. Furthermore, you want to have an idea of how much time you are willing to spend researching investment opportunities. The market is volatile and will always change. You cannot fill your portfolio with a couple international companies from around the globe and expect to sell them in 20 years for a substantial profit. While that is the idea behind investing, you still need to follow the businesses and understand what is happening in the macroeconomic environment.
Mr. Guntz relayed the idea of researching and exploring many different cultures and places to truly get an understanding of how they function with other economies. The more you experience and travel the easier it will become for you to invest globally. Investing is a long journey similar to life. Both worlds are constantly changing and the more you learn along your journey, the easier it will become down the road. Investing in a global economy can be scary to those that do not have the knowledge to go with it. It is similar to those people that fear others because they do not try to understand them. Saint Augustine provides a quality quote that can encompass our MBA international experience as well as investing in a global economy. He notes that, "the world is a book, and those who do not travel, read only a page."
Sources Cited
Gardner, Tom. Caplinger, Dan. "The First Investing Strategy You Should Learn." 2008. June. http://www.MotleyFool.com
McArdle, Megan. "The Great Stock Myth." Atlantic Monthly. Sep, 2010, Vol. 306 Issue 2, p46-48.
Pilinkus, Donatas. "Macroeconomic Indicators and their Impact on Stock Market Performance in the Short and Long Run: The Case of The Baltic States." Technological and Economic Development of Economy. Baltic Journal of Sustainability. 2010. Vol 16, Issue 2, p291-304.
Revell, Janice. "Navigating a High-Wire Market." Money. Aug, 2010, Vol. 39 Issue 7, p84-91.
Rogers, John W. "Knowledge of Stock Market Key to Investing and Preparing for Retirement." Jet. Sept, 2002. Vol. 102, Issue 15, p56.
Jeff Shjarback
http://www.tradestock.net
TradeStock.Net is designed to give investors of all levels a portal and insight on how to trade stock.
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