Investment Opportunities come in Global Asset Classes, Not U.S. Stocks

If you’re still combing the U.S. stock market for bargains, you’re looking in the wrong place.

“United States” and “stocks” are both yesterday’s news. For the next decade or so, building an investment portfolio is going to be about having the right mix of asset classes and having the right amount of global perspective.

The best investors are already looking to asset classes where most people wouldn’t think of investing. Assets like global real estate, farmland, private equity, agricultural commodities, timber, international bonds and currencies.

Asset Classes

Back in 1991, a study of 91 of the largest pension funds found that a whopping 94% of portfolio returns was not due to stock selection or market timing, but was due to having the right mix of assets in their portfolios. Since then, research has consistently confirmed those results.

Wall Street, however, has convinced American investors that U.S. stocks, especially large capitalization stocks, are still the right place to put investment dollars. Should you ignore Wall Street analysts and abandon the U.S. stock market entirely? Not entirely. But U.S. investors put far too much money in those two asset classes: “United States” and “stocks.” There is a very good chance that the U.S. stock market is in a protracted, long-term downward trend, similar to what Japan faced over a 20-year period.

“The greatest investment opportunities are much more likely to be at the asset class level than at the stock or industry level,” investor Jeremy Grantham of GMO wrote in his April 2012 report.

Grantham is big on timberland, among other assets.

So, why doesn’t everyone follow investors like Grantham and pension funds? First of all, there has been a big marketing push from Wall Street, and individual investors have a fear of anything that is not familiar to them. But there are three other reasons why Americans shun non-U.S. stocks: the first is a lack of investment information and access, the second is costs, and the third is taxes.

Fortunately, Wall Street itself has begun to create vehicles that are structured to eliminate some of the exorbitant fees on assets such as international bonds, commodities, and energy through exchange-traded funds or commodity pools. To be sure, investors need to tread lightly on these too, because what looks like a low fee or a tax-favored investment can turn out to be just the opposite. Still, Wall Street is heading in the right direction. If only more American investors sat up and took notice.

We’ll discuss some of the opportunities in international asset classes, and how to access them, in the next two columns.

(Part One of a three-part series on International Asset Classes)

Read part two