The planned opening of the Saudi Arabian stock market by early 2015 is an invitation for retail and institutional investors to go beyond national borders when buying stocks.
Actually, placing all your stock investments in one country, while it sounds patriotic if you buy shares in the country where you live or were born, is comparable to placing your eggs in one basket.
That is the gist of the advice of Dr. David Eifrig in his The Market Oracle article titled Buy American.
On the outset, it may appear like a sound investment advice, wrote Eifrig, because a large number of the best publicly-listed companies in the world are based in the U.S. He warned however, "But if you take this patriotic idea too far, your retirement portfolio is in a dangerous position. If you're like most people, you don't realize how dangerous it is."
He explained that while the U.S. would remain a dominant global economy and financial market in the foreseeable future, and with the bulk of American investor portfolios made up of U.S. stocks and bonds and the U.S. making up 46 per cent of the world economy, most American investors will be heavily "overweight" to U.S. stocks.
Eifrig said favoring local stocks is a basic behavioural error in investing, otherwise known as the "home-country bias" theory.
Challenging investors to consider a radical investment idea, he suggested that they would be better off "being significantly underweight U.S. stocks."
He explained further, "Think about it: Your income and personal well-being are already tied to the health of the U.S. economy. By owning too many U.S. stocks you're unknowingly leveraging up your exposure.
Eifrig compared it to an employee investing his entire retirement in shares of his employer. "If the company goes bust, you're out of a job and out your whole retirement nest egg," he pointed out.
Although the U.S. stock market is logging all-time highs, averaging 20 per cent annually in the past five years with the S&P 500 now valued at 20 times earnings and yields less than 2 per cent, there are other markets with better average price-to-earnings (P/E) ratio and dividend yields than the U.S.
Market Oracle posted Star Capital's compilation of P/E ratios and dividend yields of 20 developed economies, which showed that in terms of dividend yields, the U.S. is in 19th place with 1.8 per cent, while the topnotcher has a yield of 4.4 per cent.
In terms of P/E ratio, the U.S. was in 9th place with a ratio of 20.3, while the highest had a ratio of 317.2.
Here is the complete table:
Source: Star Capital, iShares
Those numbers are good guides for U.S. investors who are now considering investing in stocks outside the country. However, they should be reminded that those ratios and yields are national figures. Individual ratios and yields would vary by company.
There is still no substitute to studying the company's fundamentals when buying shares, whether the company is in the U.S. or overseas.
Heeding the advice of market experts like Eifrig as well as analysts and brokers would help. But nothing substitutes for understanding the market by acquiring investor education.
One good provider of that is InvestView(OTCQB: INVU), a Red Bank, New Jersey-based company that helps individual investors find, analyse, track and manage their portfolio. The company does it through its online education, analysis and application platform that provides analysis, tools, education solutions and an application.
It delivers subscription-based financial education courses delivered through InvestView's web site. InvestView also allows new retail investors to use the portal's subscribed information on a 2-week trial period for $9.95.
InvestView's web-based tools were designed to simplify stock research and improve the investor's research efficiency. One such tool is the Market Point, which is made up of five sections, namely: Charts, Stock Watch, Market, Calendar and Campus.