Dec. 5, 2005 - Investments - Location, Location, Location

We've all heard that "location, location, location" is the key to successful real estate investing.  Did you also know that the same rule applies to successful investing in stocks, bonds, and mutual funds?

Here's how it works.

Diversification is one of the key principles of successful investing.  For example, betting all of your money on a single stock is a very risky strategy.  If the company doesn't do well, then you can lose everything.  Just ask anyone who owned Enron.  On the other hand if the company does well, then you can make a fortune (anyone out there own Google?).  Either way, you are taking a great risk.  Diversification is a means of spreading out that risk across multiple investments.

The principle of diversification has many applications, but I want to draw your attention to geography.  That's right, your retirement accounts or other investments can benefit from geographic diversification.

The United States may be a global economic powerhouse, but that doesn't necessarily translate to your portfolio.

Here are the 2005 year-to-date returns for some common U.S. investing benchmarks:

• Dow Jones Industrial Average +0.88%
• Nasdaq Composite Index +4.50%
• S&P 500 Index +4.39%

That's not much to write home about for 11 months of work, but certainly better than losing money (remember how ugly it was in 2000, 2001, and 2002?).

Now consider how various regions of the world have fared year-to-date:

• Americas (N. America & S. America) +7.50%
• Europe +22.20%
• Asia-Pacific +15.10%

There's some serious money being made out there -- especially overseas!  Are you benefiting from these gains?  Not if your money is all tied up in the U.S. markets!

Now don't go off and invest your life savings in Russia (up 90.5%) or South Korea (up 46.2%) just because they are hot.  You will eventually get burned like those investing in Venezuela (down 32.8%) or China (down 20.6%) right now.  My point is that you need to diversify your risks across many geographic regions.

It is not enough to stick all your eggs in the U.S. basket!

Experts vary in recommending what percentage of your investments should be non-U.S.  I have my opinion too, but it depends on a person's investing goals, portfolio objectives, risk tolerance, stage of life, age, etc.  There is no single answer that applies to everyone.  Just remember that a well-rounded, diversified investment portfolio must take "location, location, location" into consideration.

That's the kind of work that a good financial adviser does to ensure that you are minimizing risks while making the most of your investment opportunities.