Is U.S. the New Japan? Then Invest Abroad

I heard from two different clients this week who asked the same question: Will investing in U.S. stocks pay off anytime soon? It's a question a lot of people are trying to sort out.

Japan's Nikkei 225 is down 80% from where it was 20 years ago. What if a similar scenario is unfolding in the U.S.? What if it's worse? Two years ago, the question would have been laughable. And although I don't assign a high probability to that outcome, we all need to plan for it.

What, in hindsight, would have been the best thing a Japan-based equity investor could have done 20 years ago? Invest in countries that aren't at risk of being dragged down because of, or in sympathy with, Japan.

Hence, for anyone who thinks the U.S. is facing the same fate, and maybe it is, it would be prudent to invest in countries unlikely to be confronting the same malaise. Clearly, just about every equity market in the world has suffered a large decline. But for many countries, the drop is cyclical, not a 20-year, or longer, structural problem.

The task is to find countries that could begin a new bull market regardless of what happens in the U.S. I would rule out Japan. Western and Eastern Europe may actually have bigger problems than the U.S. -- the coalition government in Latvia just went down over the weekend and Austrian bank exposure to Eastern Europe is 80% of that country's GDP. Those are only two examples of the trouble that may be coming.