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Thinking Globally as an American

Thinking Globally as an American

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Published by: Brian C. Beasley, CPWA on Oct 29, 2010
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03/08/2011

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Thinking Globally as an American Investor
By: Brian C. Beasley, CPWA
®
Americans are notorious around the world for their self-centered thinking. The biggest example is ouruse of languages. Very few of us speak other languages—almost everyone else in the world speaks atleast two. And we almost expect people in other countries to speak English when we travel. Oh, thearrogance, right? Now before you put me on a soap box, please know that I’m just as guilty as the nextperson. I can barely order a meal in Spanish, and my in-laws would like me to learn Tagalog (Filipino).So it is with American investors. The average American invests less than 20% of their money outside theUnited States. Most of the global economy is outside our borders. Almost all of the economic growth inthe past five years has been from emerging countries like China, India, and Brazil. With interest ratesnear all-time lows in the U.S., many other countries offer higher yields on bonds. And yet, Americans arehesitant to invest outside our borders with any enthusiasm.Our primary problem is that we think this is still the Post-World War II United States. Immediatelyfollowing World War II, the United States
was
the global economy. Our infrastructure, food production,oil production, and other resources survived the war completely untouched. The rest of the world hadbeen bombed, overrun, burned, and basically was on life support. For a good period of time, the U.S. andthe “almighty” dollar dominated the entire world economy. During this period, the U.S. owned over 70%of the world gold supply, was a net creditor nation, and an oil exporter. We also owned most of themanufacturing base for the world. Virtually everything was made here!Clearly, the United States of today is not the same as it was in 1946. Maybe we all need to change ourthinking a little. So how can an American with all of those biases learn to embrace the reality of today’sglobal economy? How can we think as globally as investors in other countries? Here are three ideas thatmay help:
1.
 
The Dollar is a Variable, not a Constant
 We have to learn about other currencies. That Ford car that we buy with dollars is sold in Europe forBritish Pounds, Euros, or Swiss Francs. People pay for their iPhone in Japan with Yen. This is obviousfor anyone who has traveled, but have you ever thought about how this affects global trade? What aboutall the products made in China? The Chinese currently manage the exchange rate between their currency(Yuan) and the U.S. Dollar. It’s been relatively stable for a few years. But what if they allowed theircurrency to fluctuate more? These are questions that investors outside America understand. Generally,Americans aren’t keeping up. With your investments, you must think beyond dollars.
 
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Also, the value of a dollar is not fixed. Rather, the value of a dollar can change dramatically over time.“But I get paid in dollars!” you say. “My statements are in dollars. I buy groceries and pay my bills withdollars! Why do I need to pay attention to changes in the dollar?” Maybe this will help illustrate how thedollar’s value changes:I could leave you with dozens of other examples. “Sure,” you say, “That’s just inflation. I know all aboutthat.” Take a long hard look at that chart. Can you honestly tell yourself that the dollars in your checkingaccount/CD/T-Bills will buy the same goods in two years? “Yeah, Brian, but the government tells us thatthere is no danger of inflation right now.” Okay. It’s true that inflation can happen when demand forgoods outstrips the supply of those goods. We’ll call that “demand-driven” inflation. This is the typicalinflation that we’ve experienced out entire lives. Lately, demand has been pretty low for a lot of products, especially in the housing market. But did you know that “inflation” can come from anothersource?When the dollar loses value against foreign currencies, imported goods from those countries go up inprice. For example, let’s say a Toyota automobile is made in Japan with Yen. Toyota motor expects toearn a certain number of Yen when you buy their car. But if the Dollar falls/Yen rises, it will take moredollars for Toyota to cover their costs and make a profit. You and I will see that as a higher price for thatcar.
 
For a global investor, it’s not the number of dollars in their account that matters. It’s what they can buywith their currency! The value of a dollar can rise or fall relative to oil, Chinese-made finished goods,imported food, etc. So a global investor might consider spreading their risk by owning many differentcurrencies. Global investors sometimes own commodities or precious metals in an effort to preserve theirpurchasing power.
2.
 
Notice the Potential Power of Large Numbers
 In a global economy, we should pay attention to where trade is occurring. Generally, where most moneyand people are, trade should be highest. Let’s look how the global share of the economy has changedover the years. (OECD countries basically include: Mexico, Chile, South Korea, Western & CentralEurope, Australia, and Japan)Notice how the western share of the world economy (red, blue, & yellow) has declined slightly. But look at China and India (green & pink). China’s share has quintupled. India’s has nearly doubled! Nowconsider the following:

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