Why Your Retirement Savings Plan Should Go Global

The massive shift in international commerce and the growing importance of globalism have forever shaped our world – and retirement accounts. Does your retirement account reflect today’s globalism, or is it still stuck in yesteryear’s domestic boundaries?

Even as our lives are becoming more interconnected, many retirement portfolios aren't. In fact, investors who first began thinking about retirement more than a decade ago probably haven't considered the new emerging markets of the world or how other countries will play into their future retirement plan. The disconnect between American investors and the rest of the world is growing dramatically.

Go back in time fifty years, and a retirement plan would have been in the form of an employee-sponsored pension at a factory. Only one person worked, and the whole family could be sustained on one-income, with an entire retirement pension income afforded by a lifetime of work for only one employer. Today, that picturesque scenario has completely changed. Pensions are a dying breed in industry outside of public service, and more investors are carrying the full risk of their retirement plan on their shoulders.

Going Global with Emerging Markets is a Necessity


It has been said that the emerging markets of the 1800s was most of Europe, the emerging markets of the 1900s were in North America, primarily the United States, and that in the 2000s, the emerging markets are in Asia, Latin America, and China.

A study conducted by a global economic research institute found that in the next decade, a majority of economic growth will be in emerging markets such as Brazil, Russia, India and China, while the developed world, mostly the G20 nations, slip into a period of slower growth. The standard of living in the developed world well exceeds that of the emerging markets. However, as we've seen throughout history, globalism often leads to a leveled playing field.

While the change in the world economy is something many have latched onto – and many more have used as a point to incite fear – there really is nothing to fear about a slowdown in the developed world. The developed world still maintains the most productive employees and the best educated people.

The shift is perhaps more social than economic. World War II left behind a huge cultural shift. Baby booms in the United States and Europe leave both areas with aging populations who simply cannot work. By contrast, much of the emerging markets have younger populations who are old enough to work, but are still years from dependency.

Global Emerging Markets

Courtesy of leveragedetf.org


Grabbing Growth Overseas


Most wholly American firms are finding it difficult to compete overseas, where they find that the local cultures, traditions and people simply demand a different product than firms are used to providing in the United States. As a result, US-based firms are routinely paying larger dividends and returning more cash back to investors, as they see little room for investing overseas or taking a stab at international acquisitions.

Alas, firms from the developed world aren't finding domestic growth, either. Americans already have cars, cell phones, computers, and all the other consumer necessities. Those low hanging consumer products, though popular in the developed world, are only beginning to show up in the emerging markets.

Accessing Emerging Markets is Cheaper than Ever


In the past, taking a retirement portfolio global to emerging markets meant high annual expense ratios for mutual funds, or even higher transaction costs for the purchase of international equities. Through the last decade, however, the emerging markets have opened up their markets to foreign investment, and fund companies have opened up even more emerging market funds.

One of the most commonly utilized methods for investing in emerging markets is the exchange-traded fund, which can be purchased just like any other stock in the stock market. Emerging markets attracted some $30 billion in ETF inflows in 2010, and many expect the trend to only continue.

Real Diversification


The simple fact of the matter is that without any exposure to global assets, investors are horribly under-diversified. In fact, even at America's manufacturing peak in the 1950s, the United States made up less than one third of world output.

Today, the United States' share of world output rests at 22%. Western Europe manages to hold onto 21% of world output, while the emerging markets make up an even greater share. China produces roughly 14% of all the goods and services the world produces, while Latin America and India make up 8% and 5% respectively.

The developed world will remain an excellent source for inflation tracking performance or income generating stock funds. However, growth from a growing consumer base or expanding production capacity will be found in the BRIC countries, specifically Brazil, Russia, India and China, as they transition from small, mostly export economies to full-on consumption economies.

Placing a small portion of your retirement savings in emerging markets allows for access to high growth, but high risk investments, while other investments in developed regions provide low growth, but income and value.

Today, no retirement portfolio can be considered diversified without exposure to the world markets. Even as the emerging markets become more popular, investors in the developed world maintain portfolios that are heavily centered on countries with a very small portion of total world output. Most, however, could be corrected with one minor change. Swapping exposure to developed world small cap funds for emerging market equity funds increases a retirement portfolio's reliance on global trade, without changing the beta (volatility) dynamics.
Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...

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