Gilligan would love this investing idea

An investor living on an island in the middle of nowhere would probably have a better perspective on investing than someone living on the island of Manhattan.

At least financial planner Robert Kreitler thinks so.

He calls it the “island principle,” and it’s the centerpiece of his book, “Getting Started in Global Investing.”

The gist is that U.S. investors put far too much money in domestic equities. Instead of portfolios with, say, 75% in the U.S. market, investors should put that much into foreign markets.

“It’s useful to escape to an island to knock down some of the mental barriers on how we invest,” says Mr. Kreitler, whose New Haven, Conn., firm manages $55 million.

But financial advisers given a summary of the island principle say that if they proposed such an allocation, they’d be banished to the island of no clients.

For them, foreign markets are too susceptible to currency risk, political instability and weaker corporate performance standards. The United States is far sounder and more stable – and who can argue with recent 20% returns on blue chips?

“I understand that if I lived on an island somewhere, I’d look abroad to buy. But I live in the U.S., and so do my clients, and if they lose their assets or fail to get returns because they’re invested elsewhere, I would lose my clients,” says William Baldwin of Pillar Financial Advisors in Waltham, Mass.

Playing to extremes

Mr. Kreitler recognizes the dilemma but still thinks investors should diversify in six to eight global mutual funds based on growth and value allocations.

“We do have 21 developed markets, so we can do diversification to reduce risk, and the U.S. has never been the best-performing market,” he says.

Mr. Kreitler, whose firm operates as a branch office of Raymond James Financial Services Co., is gradually exposing his clients to the concept.

“I do recognize the island principle is at one extreme. I don’t expect people to automatically adopt this,” says Mr. Kreitler, whose website is islandprinciple.com.

The book argues that most U.S. investors overlook the sound markets in nations that resemble the United States in political stability, accounting practices and market regulation.

“Most U.S. investors are surprised to learn that since 1970, the United States has never been the best-performing developed market in the world,” Mr. Kreitler writes.

In the later 1980s, the best-performing markets in dollar terms were Austria, Denmark, Japan and Spain. In the 1990s, the United Kingdom, Hong Kong, Finland, Switzerland and again Spain topped the list.

In fact, from 1970 to 1998, there were 15 years when the U.S. market fared better than that of the average developed country and 14 years when it performed worse, Mr. Kreitler says.

Most of the special risks associated with foreign investing can also apply to U.S. stocks, he says.

The United States is not always the most politically stable country – considering impeachment, new laws and wars – and the dollar is also subject to fluctuations.

The drawback to his proposal is the lack of global products. Out of the thousands of mutual funds, only 24 global funds have track records of at least 10 years. “A potential weakness is we do not have enough choices,” says Mr. Kreitler. “We need more.”

Roger Ibbotson, chairman of Ibbotson Associates in Chicago and a professor at the Yale University School of Management, says that though global investing is nothing new, Mr. Kreitler’s book – for which he wrote the foreword – is “a fresh look at a theory that has been underutilized.”

Robert Markman of Markman Capital Management in Minneapolis disagrees with Mr. Kreitler’s plan. “Unfortunately,” he says, “the times when the U.S. market is at its worst, when we are having our apocalyptic days, that’s when the international markets move in lock step. Right when you want that diversification hedge, it disappears.”