Cut Back On Foreign?

There is a good article at the Wall Street Journal (subscription required) about whether now is a good time to cut back on foreign stocks. The article quotes several people that believe US investors should cut back, mainly because of the strength of the dollar. I have put up a couple of charts showing how the impact of this has caused ordinary shares to out perform ADRs in last few weeks. The article also suggests a couple of the currency OEFs I have written about before.

Taking the other side of this, from primarily a contrarian view, is David Jackson from Seeking Alpha. He posted his article on the ETF Investor page. I would encourage anyone to read both articles.

My take on this is a little different, maybe in the middle? The WSJ article says the dollar is up 12% this year. Well a big chunk of that has been in the last few weeks and caught a lot of people by surprise in terms of magnitude after the respective non and nee votes on the Euro Constitution. In the last couple of days, before this morning's trade numbers, the dollar had a serious, but short, decline.

I wrote a few days ago that it seems like FX volatility has increased. I think it makes more sense for most do-it-yourselfers to base decisions about foreign allocation on bigger picture issues than currency trends. Trying to game moves in the FX market with your stock and bond portfolio is likely to create excess trading without much added return.

I have a couple of big and simple themes behind my foreign decisions. I want developed commodity based exposure (Aus, NZ, Norway, Canada and maybe Sweden a little too) because of the different economic cycle, I want emerging market exposure (Brazil, Israel, India, China, South Africa) for the long term growth potential and I want foreign service based (Ireland England, Switzerland) for many reasons including dollar hedge and safe haven aspects. These themes have several intersecting stocks within client portfolios. The other big thing about foreign is the often superior dividends which continue to be attractive with a flattish US equity market.

I think it makes much more sense to focus on these more fundamental concepts than short term currency trades.