Getting Started In Global Investing, Introducing the Island Principle

For many investors, the hardest part about investing globally is moving away from the familiarity of Wall Street and toward uncharted "foreign" markets where investing is said to entail extra risk. This book is designed to open investors' eyes to investment possibilities around the world, to allay their fears about the supposed risks of investing outside the United States, and to describe a simple global investing strategy available to any individual investor regardless of the size of his or her portfolio.

This global investing strategy is called The Island Principle because it asks investors to move mentally to an imaginary island and abandon their very normal bias toward Wall Street. Shifting to an island perspective dramatically changes the investor's view of the investment prospects around the world.

The Island Principle asks investors to diversify into multiple geographic markets. To do this investors must start viewing the world as many separate market choices, not just two investment pools-the United States and everywhere else. This simple change in viewpoint increases their investment opportunities exponentially. It allows them to apply the unique ability of diversification to markets. By investing in multiple markets, they can both reduce risk and improve returns in their portfolios.

Developing a global investment perspective and shifting away from a focus on the U.S. market is key to implementing The Island Principle. The Island Principle also asks investors to diversify the critical decisions about choosing which markets around the world they should invest in. They do this by using several global investment experts, typically the managers of global mutual funds. These experts are the island investor's crew, hired to do the research and analysis on both U.S. and non-U.S. markets and the individual stocks available in each one that investors themselves would find difficult or impossible to do on their own. Once they have assembled their crew, island investors allow them to do their work without interference. The investor's job becomes one of steering the portfolio's course and monitoring its progress toward his or her investment goals.

NAVIGATING THE ISLAND PRINCIPLE

Getting Started in Global Investing offers both novice and seasoned investors a new perspective on investment theory and strategy. Chapters 1 through 5 provide investors with the basic investment rationale behind The Island Principle. They provide a clear explanation of many investment basics as they relate to global investing and show how The Island Principle is an extension of what has come to be called Modern Portfolio Theory. Chapters 6 and 7 outline clear steps any serious investor can easily take to create a global portfolio with surprisingly little effort.

Chapter 1: A Fresh Perspective

Investors whose portfolios are invested heavily in U.S. stocks need to get away to an island perspective in order to reassess what they think they know about building a portfolio. The habit of lumping all markets outside the United States into a single "foreign" category severely limits an investor's options to two markets-U.S. and non-U.S. In reality there are 50 different markets around the world, and 21 of them (including the United States) are considered developed markets. Astute investors recognize that 21 individual markets provide them with new opportunities for portfolio diversification.

From the island vantage point, investors can see that the United States has not always been the world's best-performing market over the long term. Going global can also be good for an investor's bottom line. Investors can also see that having 100% of their portfolios-even 90% or 75%-in a single market not only ignores their many global investment opportunities but is also unnecessarily risky.

Chapter 2: All at Sea about Risk

Every investor confronts an age-old bugaboo-risk. Investors accept the fact that risk and return are inescapably coupled-that seeking higher re-turns means accepting more risk or, conversely, that keeping risk at low levels means accepting low returns. Many investors believe global investing is risky even though, approached the right way, it can actually reduce portfolio risk.

Regulatory bodies require that investors be warned about the risks of foreign investing whenever they purchase stocks in companies outside the United States or mutual funds that invest in non-U.S. stocks. These dire warnings about things like political instability, confusing accounting systems, currency fluctuations, and lax regulatory environments scare many investors away from non-U.S. stocks. The Island Principle points out how many of these risks also apply to U.S. investing and how global investing can actually reduce them.

Most investors are unaware of all of the very real risks that every investor faces. Investing only or evenly mostly in a single market is actually quite risky, while investing in multiple markets (countries) can reduce long-term risk. Global investing is not only less risky than many investors believe, but it can also be a wonderful tool to reduce the long-term risk in their portfolios.

Chapter 3: A Compass to Steer By

Through time, investors have sought ways to manage investment risk. Some choose to simply ignore it (assuming their resolve holds). Others invest conservatively, understanding that this will limit their portfolios' performance. Some decrease their portfolios' allocation to stocks, again understanding that this will affect their returns. Diversification is a tool investors can use to manage risk without reducing returns. The secret to making diversification work is to choose in-vestments that have low correlations. That means that they move differently from one another: What affects one has little or no effect on the other, and vice versa. Most investors understand that they should diversify by owning multiple stocks, multiple industry sectors, and multiple asset classes such as stocks, bonds, real estate, or cash.

Diversification with low correlation is the cornerstone of Modern Portfolio Theory. The Island Principle extends this investment theory to multiple markets to give investors a new level of diversification to help them manage risk.

Chapter 4: Mapping Goals

No single investment strategy works for every investor. Before applying the global investing strategy of The Island Principle, investors need to examine their personal motives and financial goals. The Island Principle can help many but not all investor types. The Island Principle is a long-term investment strategy, so it offers little to those who see investing as a game or sport and relish frequent trading. It can, however, help other types of investors. The Island Principle's rationale can encourage investors whose current investment strategy is to match a particular index to reexamine their investment objectives. Risk-averse investors who want to preserve their capital or enjoy a fixed level of income can follow The Island Principle to become more comfortable with investments that have potentially higher returns. Investors seeking growing income in their portfolios, those pursuing total portfolio returns, and those seeking aggressive growth can all benefit from The Island Principle's ability to narrow the range of outcomes they face from following any strategy over a long term. By helping them reduce risk, The Island Principle in-creases their chances of reaching their financial objectives.

Chapter 5: Casting Off

Island investors are in for the long term. They want to manage risk, seek higher returns, or do some of both within their portfolios. They are willing to own stocks outside the United States and to abandon their fixation with the Dow or the S&P 500 or any other index. They are concerned not only with their portfolios' current value but also with their future buying power. Very importantly, they are willing to share the decisions about where to invest with others rather than making these very important decisions on their own.

The Island Principle extends Modern Portfolio Theory to markets and treats countries as though they were an asset class. This new level of diversification helps investors deal more easily with investor psychology and helps them escape the inevitable risks that exist in any single market

(including the United States). Diversifying currencies helps protect an investor's future buying power. Using multiple global managers to decide what countries to invest in reduces the risk that the island investor will buy stocks in the wrong markets.

Setting realistic goals for portfolio risk and returns is a crucial step in applying The Island Principle's strategy. That done, investors can search for several global money managers to help them decide what markets are most suitable to meet their goals. Individual investors, even those with small portfolios, can gain easy access to global experts through mutual funds. Global mutual funds also offer a simple way for investors to surmount the difficulties of trading in other markets and dealing with multiple currencies.

Chapter 6: Choosing Individual Managers

With their sights fixed on their future financial goals, island investors understand that the decisions about which countries to invest in are crucial to achieving long-term success. They research and choose their portfolios' global managers with care.

"Global" is the operative word. Island investors want managers who are free to choose stocks from any market throughout the world, not those limited to a single market or even a single region. They look for experience and pay close attention to philosophy and style. They analyze the available hard data about a global mutual fund and its manager, interpret the information they find in the financial press, and then use their best judgment to select multiple managers who appear to meet their criteria.

Chapter 7: Assembling the Crew and Staying on Course

Island investors want a balanced crew of managers. They want managers whose styles are different so that the stocks they choose for the investors' portfolios will behave differently. This adds yet another level of diversification that helps island investors manage risk.

Investors who are primarily invested in the U.S. market will probably develop their global portfolio in stages, gradually moving from 100% in the United States to a portfolio invested in markets throughout the world over a period of several years. Once their portfolios are in place, is-land investors will monitor the performance of each individual global manager as well as that of the portfolio as a whole to make sure that it is on track.

Again, the hardest part of developing a global portfolio is making that initial shift away from Wall Street and becoming comfortable with "foreign" markets. Investors who are ready to drop their preoccupation with the Dow or the S&P 500 and who want to put the power of new levels of diversification to work in their portfolios are ready to follow The Island Principle to secure their financial futures.