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The New Global ETF Investor - back to Contents >
Introduction
A Tale of Two Investors
On a bright summer day in 1980, two young men in blue suits, starched white shirts, and well-polished shoes began their careers as junior executives at the same Chicago publishing company. They were very much alike, these two young men. Both were bright, hard working, and had ambitious goals in life. They both read the Wall Street Journal every day and saved and invested 10% of their salary to build their retirement nest egg.
As expected, both men steadily rose through the ranks to become Managing Directors: one became head of manufacturing, the other head of research.
Forty years later in 2020, at age 65, both are healthy and they remain fast friends.
However, they live vastly different lifestyles.
One brings his extended family with him every summer to his vacation home in Maine and escapes the bitter Midwestern winters to a condo in Hobe Sound. He has plenty of time for charitable activities and plays golf with friends four times a week.
The other, while retired from the pharmaceutical company, works as a consultant and has little free time to travel and visit his eight grandchildren. As you might imagine, he envies his friend’s relaxed and worry free life.
What Made the Difference
Have you ever wondered, as I have, what make’s this kind of difference in the size of people’s nest eggs when they retire? It isn’t always financial background, talent, saving and investing habits or even income. It isn’t that one plans for retirement carefully and the other doesn’t.
The Challenge
Imagine if you tried painting a picture using old brushes and only three colors rather than the finest brushes and a rainbow of colors? Or playing competitive golf with three old rusty clubs instead of using fourteen clubs utilizing the most modern technology? It’s the same thing in investing. Investing is hard enough without making it more difficult by using old investment tools, narrow outdated strategies and trial by error methods. Let me ask you just three questions:
Are you still primarily invested through mutual funds that have an average expense ratio of 1.6% plus high annual capital gains distributions?
Are you still limiting your investments to the United States and ignoring global markets and 75% of the world’s opportunities?
Do you realize that investing primarily in the S&P 500 and other broad U.S. and international index funds is unsafe?
A Global Perspective is Essential
In the good old days, investing primarily in the United States made sense. The U.S. produced more than half the world’s output, the U.S. dollar was king, our manufacturing base vibrant and, for the most part, the rest of the world was behind.
To use such an approach today would be a mistake. America accounts for only 25% of global output, the dollar has recently fallen against the Euro, 75% of the world’s companies are located outside the U.S., and growth rates in other countries can be two to three times higher as well.
In the last ten years, the U.S. has never been the world’s best performing stock market.
In fact, it has never ranked higher than fourth place.
During the 1980’s European and Asian markets grew 68% faster than the S&P 500 index. During the 1990’s, the slowdown in Japan and the U.S. tech boom left many investors thinking they didn’t need international exposure but than the bubble burst and the S&P 500 dropped 44% in two years.
In 2003, the S&P 500 index finally rebounded nicely but it was still beaten by 30 international markets. Here’s a few: Sweden, up 61%, Germany, up 60%, Austria, up 54%, Spain, up 55%, India, up 75% and Japan up 89%.
During the past 12 months through March 2006, Brazil has been up 84%, Austria up 38%, Japan up 32%, Switzerland up 24%, South Korea up 41%, South Africa up 50%, Germany up 27%, China up 36% and Sweden up 26%.
During the past three years, Chartwell’s first four model portfolios have had annual average returns of 16.7%, 27.2%, 29.3% and 26.2%.
All this is happening against the backdrop of the S&P 500 index and the Dow Jones Industrial Average being flat as a pancake over the past five years.
Here’s a shocker. During the past 25 years, a blended portfolio of 60% U.S. stocks (MSCI USA index) and 40% international stocks (MSCI Europe, Asia index) was less volatile than a S&P 500 index fund.
Meanwhile, the U.S. has more workers in state and local government than in manufacturing, the last monthly merchandise trade surplus occurred during the Ford Administration and our budget and trade deficits together will exceed $1.3 trillion this year alone. America’s total debt now exceeds $32 trillion, more than three times its GDP.
It is common to hear that if California were a country, its GDP would rank fifth in the world. Less common is the fact that if Wal-Mart were a country, it would be China’s fifth largest trading partner!
Wal-Mart will import $20 billion of goods from China this year. Home Depot will purchase 200,000 cargo ship containers full of goods from China. It would be nice if both companies would fill them up with American goods instead of sending them back empty. UPS reported that their shipments from China to the U.S. so far this year are up 129% over the previous year.
The U.S. purchases $1 million of Chinese goods every minute and the US Federal Government spends $5 million each minute. The US had an $800 billion trade deficit in 2005 and has trade surpluses with only the following nine countries: Egypt, Singapore, Belgium, Luxembourg, Haiti, Lebanon, Netherlands, and Panama.
Let’s be blunt, even if you believe as I do that the United States is the best country in the history of the world, it makes about as much sense to invest in only one country as it does to invest in only one company or one industry.
From an investor viewpoint, America remains the broadest, most dynamic and most liquid economy and stock market in the world. It is clearly ‘first among equals” and deserves a substantial allocation in any investors portfolio.
At the same time, one would have to be an ostrich not to see how the world is changing. Huge countries like India and China have awoken to capitalism after many decades of being frozen in communism and socialism. Furthermore, the Internet has greatly accelerated their ability to catch up to the developed world.
Americans who only invest in domestic markets face the real risk of falling behind and putting their nest eggs at risk. A well- diversified global portfolio is not more risky and volatile than investing in a S&P index fund, but rather it is safer and more conservative. After all, let’s remember that the S&P 500 fell 44% from March, 2001 to September 2002 and that this index is down over the past five years.
Like any good cooking recipe, the key is carefully blending the ingredients.
Gentle reader and investor, which portfolio over the next 3, 5, 10, 15 or 20 years do you think will be safer, more conservative and still offer you some good growth potential? One invested 50% in a S&P 500 index fund and 50% in US Treasury bonds?
Or would you rather have a portfolio invested 50% in US equities and Treasury bonds and the balance divided carefully between global bonds, precious metal funds, timber, real estate funds, and index funds of countries such as Switzerland, Singapore, Australia, Malaysia, Sweden, Hong Kong, Ireland, Japan, Austria, Norway, India and Canada?
Likewise, if you wanted to invest in the pharmaceutical industry, would it be smarter to invest in one dominant company like Merck? Or might it be better to invest 30% in Merck and allocate 10% each to seven other companies with perhaps greater growth potential?
A New Tool for a New Era
But just as important as where you invest your savings is what investment tools you use.
The explosion of investment choices from hundreds of complex annuities to thousands of mutual funds and over 10,000 publicly traded stocks in the U.S. alone is enough to drive anyone to distraction. Despite all these investment options, investors are searching for better options and this book offers a different perspective that may dramatically simplify and improve your financial life.
Be warned. This is not your typical investment book recommending the same old products and strategies. Rather, it describes a revolutionary approach to both where you put your money and what investment tools you use.
My goal for you is twofold: to think about investing and building wealth with a much more global perspective and to learn how to build a global portfolio using the fastest growing core investment tool on Wall Street: exchange-traded funds (ETFs).
This book distills “lessons learned” from almost twenty years in the investment business: as a financial advisor and stockbroker with two major firms in the U.S. and Asia, as an international banker in London, consultant to the U.S. Treasury and U.S. Congress, member of the Executive Board of Directors of the Asian Development Bank in Manila, and finally, as head of a global investment advisory firm specializing in helping investors build global portfolios.
First, we will go back and look at how the investment business has evolved over time and how it might explain a key question: why are so many investors disappointed with their investment options and financial advisors?
Whys has investor preoccupation with index fund investing led them astray and put their portfolios at risk? What do we need to do to get back on track and reach our goal of financial security, freedom and independence?
With this vital historical perspective in hand, we will make the case for having a global perspective in building a portfolio with our unique “Buy Countries, Not Stocks” approach.
Next, we move to what investment tools to use to build your global portfolio and introduce you to exchange-traded funds (ETFs), and, in particular, iShares. We will outline the many advantages of using ETFs and then briefly outline the 100 iShares ETFs and other ETF families such as Powershares and Rydex currently available to help you build a global portfolio.
Next, we will describe the remaining six investment edge principles that will help you harness the power of ETFs, better manage portfolio risk and tilt the odds of long term investment success in your favor. Investing with more of a global perspective and understanding opportunities in international and especially Asian markets will be a key theme.
Some of the other issues we will examine are market timing, small company vs. large company investing, the importance of asset allocation and growth vs. value strategies. After a brief description of Chartwell’s model portfolios, we will close by offering advice on how to execute your investment plan.
You will likely need some help in executing your plan and building your global ETF portfolio. Your advisor should be part of a new breed of advisors that watch global trends and have a global perspective.
About those two colleagues I mentioned at the beginning of the letter. What made their retirements so vastly different? One invested exclusively in a S&P 500 index fund. The other built a global portfolio using low cost ETFs leading to superior performance.
This book will encourage you to re-think your approach to investing and that you will consider joining the new breed of global investors like those members joining ChartwellETFadvisor.com. My hope is that you will find this book practical and interesting. Before getting started, let’s lead off with a principle that will put you in the proper frame of mind for what’s to come.
Bottom Line Investment Edge
Principle #1
Investing your life’s savings is serious business. But investing is also a game inevitably full of unexpected twists and turns, eccentric characters and winners and losers. You must accept that there is no silver bullet and be content with putting the odds of success in your favor. Keep an open mind and think of the world as your investment universe.
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