June 21, 2011 by tfroberts

It's no secret that we have a spending problem. Just as you will find your credit score going down if you spend up to your credit limits and more than you bring in, the US is facing a potential credit downgrade. It doesn't matter if S&P or Moody's makes it official. What really matters is what large investors think about the US's ability to pay it debts in the long run. At this time, investors still gravitate to US debt and the dollar when markets look risky. However, they have decided that it makes sense to diversify into other countries that may have stronger balance sheets, better cash flow and smaller long term obligations.

One such investor is PIMCO Total Return , the nation's largest mutual fund with $240 billion in assets. Fund manager Bill Gross continues to reduce exposure to the US Treasury market. By the end of April, the fund had increased its net position in government bonds to negative 4% (that is, net short). The fund has shifted its holdings to mortgage based securities, non-US debt, municipal bonds and currency. Other investors, such as China, are also diversifying away for US debt.

What does this mean for you? The cost to the Treasury will go up to attract investors. For buyers this means higher returns. For taxpayers this means higher bills. As an investor, I encourage clients to diversify their bond and debt investments outside the US. However, aren't those investments riskier? Diversified investing may better address the list of financial risks better than "safe, US government" investments. Higher rates of return can help avoid inflation risk. Diversification can also avoid company, industry or country risk.

The best investments for you may not be the ones your neighbor has. Take a look at your situation and needs. We buy many of our products from foreign suppliers; it is time to look at being a global investor. If you want more detail, I'll be happy to send you a Vanguard report, which outlines the benefits and risks of investing globally.