Plunging Chinese stock prices may have U.S. investors concerned about their exposure. But, for the most part, they probably don't need to worry.
Advisors say many U.S. investors, especially those who have diversified, won't feel a huge bite to their overall portfolio.
For one, most U.S. investors and mutual funds own shares of Chinese companies traded on the Hong Kong Stock Exchange, not the Shanghai Stock Exchange, said Patricia Oey, senior fund analyst at investment research firm Morningstar.
While the Shanghai Composite stock index, which tracks China's benchmark stock market, dropped 8.5 percent on Monday, suffering its biggest daily loss since 2007, Hong Kong's Hang Seng Index fell 3.1 percent.
"You have to look beyond the headlines about volatility in Chinese markets and evaluate your entire portfolio," Oey said.
A lot depends on your asset allocation.
Let's say an investor has a retirement portfolio with 60 percent invested in stocks and 40 percent invested in bonds, a standard asset allocation. If 20 percent of the portfolio's equity portion is invested in an emerging markets fund, again a common allocation among long-term investors, that fund may have 25 percent of its portfolio invested in Chinese stocks. (Emerging market funds in the U.S. had an average 21.5 percent allocation to Chinese stocks as of the second quarter, according to Morningstar.) In this example, only about 3 percent of the entire portfolio would be in Chinese stocks.
You can run a similar analysis on your own portfolio. Morningstar and Google Finance, for example, offer free tools to help investors analyze the exposure of their fund portfolios to international markets.
To be sure, turmoil in the Chinese stock market can spread and damage the earnings of companies who operate there. "[But] the effect on earnings of multinationals is hard to tease out," Oey said.
Many large U.S. public companies do not break out sales in China, said Howard Silverblatt, a senior index analyst for S&P Dow Jones Indices. Silverblatt, who studies S&P 500 companies' revenue from foreign sales, said that companies also don't usually report manufacturing costs and other services in China that are "very important to the bottom line."
Last year, the percentage of total sales revenue from sales in foreign countries grew among S&P 500 companies after five years of stagnation. The overall rate for 2014 was 47.8 percent, up from 46.2 percent in 2013. S&P 500 sales from Asia grew last year, but not rapidly, with 7.8 percent of S&P 500 sales coming from Asia, up from 7.7 percent in 2013 and 7.5 percent in 2012.
"From an investor perspective, it would be beneficial to be able to create a matrix based on production and sales that accounts for parts made in China, assembled in Europe and sold in the U.K., with profits translated into U.S. dollars," Silverblatt noted in his July report on 2014 S&P 500 foreign sales. "Investors could then fill in the currency rates and see the income impact."
Still, despite the lack of transparency in Chinese markets, the opportunities are too large for most investors to ignore, say financial advisors. Just be careful.
"The Chinese economy is large, dynamic and growing. Indeed, it is second only in size to the U.S. economy," said David Mendels, director of planning at Creative Financial Concepts in New York City. "But don't kid yourself. What you see is almost never what you get."