You Can Diversify without Global Funds
By Saghir Aslam
Irvine, CA

(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)

You may like Greek food. You may be grateful for ancient Greek democracy. You may even have read the Iliad.

So what did you do to Greece, you wonder, that made it play such havoc with your 401(k)?

The short answer is that it really is a global economy these days, and a slip in Greece can become a plunge on Wall Street. And oddly, for that very reason, you may not need an international fund in your portfolio.

Greece’s gross domestic product is $305 billion, which is less than the combined assets of the nation’s two largest mutual funds, Pimco Total Return and Vanguard Total Stock Market Index fund. Its sovereign debt—repay—is 340 billion euros, or $458 billion.

In contrast, U.S. GDP is $14.6 trillion, and its public debt—mainly Treasury bills, bonds and notes—is $10.3 trillion.

Greece got so far into debt because of its rich government salaries, benefits and its lax tax collection. When the government didn’t have enough money, it borrowed more.

Why were borrowers so willing to lend to Greece? Because Greece is part of the eurozone—the 17 nations that use the euro as currency. Borrowers thought the eurozone’s 16 other nations wouldn’t let Greece default.

Many of those borrowers were banks, who could use Greek bonds as capital—the oney used as a cushion against looses. As the Greek crisis worsened, it became clear that Greece couldn’t pay off all its creditors, many of which were large European banks.

Investors then started looking askance at other countries, notably Portugal, Italy, Ireland, and Spain. They also began backing away from European banks. The nightmare scenario: The euro would collapse, and people who held euros would have to exchange them for newly minted francs, drachmas and blatherskites.

Problems went from tiny Greece to the eurozone, and ultimately, to the U.S. If European banks were to collapse, U.S. Banks might also run into problems, and banks never suffer alone. It’s hard to have a healthy economy without a healthy banking system.

World central banks came together to help ensure that European banks could get enough dollars to repay dollar-denominated loans. It’s not a cure; it just helps make sure that the financial system can keep operating while the Europeans sort out their problems, if they can.

All of which brings us to international funds. Most people own international funds for diversification: There’s usually a bull market somewhere on the planet.

Unfortunately, most international stock markets run more or less in lockstep with the U.S. markets. Consider the Lipper international large-cap core index, which measures the largest international funds—the ones most likely to be in your 401(k) or your regular or Roth IRA, for some of you it is employee benefit plan similar to 401(k). Does not matter which one the rule is the same (“Large-cap core,” in fund-speak, means the fund invests in stocks of large companies selling at reasonable prices, relative to earnings.) International large-cap core funds track their U.S. counterparts extraordinarily closely. The past five years, Lipper’s large-cap core international and large-cap domestic core indexes have a 94% correlation.

True, there are many dandy companies headquartered overseas. But the stocks of these companies are often traded in the U.S. too.

Foreign funds are hurt when the dollar rises in value—something it has been doing lately, because investors aren’t entirely convinced that the euro will survive.

If you must have an international fund, look for one less correlated with its U.S. counterparts. One place to look is Lipper’s multicap core category. These funds can invest in large or small companies, which give them room to roam.

Because these funds do have room to roam, make sure they roam in a direction you like. First Eagle fund, for example, has SPDR Gold Shares as its sixth-largest holding, says Morningstar. SPDR Gold Shares invests directly in gold bullion.

Nothing wrong with that, but it does show that the fund’s managers have an independent streak—and there’s nothing wrong with that, either. If you’re looking for diversification, you’ll need a fund that doesn’t march in step with everyone else. Many international funds do.

Let me share with you how I created my own mutual fund. Kennedy Kabbot (brokerage firm) not in business anymore would promote certain companies which you could buy zero commission pick and choose. Each time they made this offer I would cherry pick with the result I had bunch of great companies in each sector.

For example from fast food what I call junk food I picked McDonalds then Homedepot, Downey savings, Nordstrom just to give you few examples. Many of these companies not only paid dividends, but dividends grew each year. Anyway I had a heck of a mutual fund.

(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr. Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, or does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr. Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr. Aslam does not have anything for sale.)



Editor: Akhtar M. Faruqui
2004 . All Rights Reserved.