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International Investing: Show Your Portfolio the World
Diversification is more than making sure your assets are divided among stocks, bonds and money market securities. It also means finding mutual funds and other investments to take advantage of the commerce that happens in markets around the world.
Reasons to Invest Internationally
Types of International Stock Funds
International Bonds
Risks of International Investing
Reasons to Invest Internationally
There are several reasons to include the world’s financial markets in your investments:
- Investing in many different markets spreads your risk across a wider area. So a market decline in one region may be offset by a gain in another. While movements in the markets rarely coincide exactly with a gain in one market precisely offsetting a loss in another, such a strategy can have a positive long-term effect on your portfolio.
- Economic expansion occurs in countries all over the world, often at different times. Governments change; corporations move and grow. A global portfolio has the potential to take advantage of opportunities as they arise.
- Global markets are growing in relation to the U.S. markets and their combined size is formidable. The U.S. stock market accounted for 46% of the world’s market value in 1999. Compare that to 1970 when the United States accounted for 66% of the global market.
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Types of International Stock Funds
Not all international stock funds are the same, so you should carefully consider the type of funds you choose.
- Emerging market funds generally invest in companies in foreign countries that are making the transition from a government-run economy to a free market, or from an agricultural to an industrial economy. These markets may be particularly volatile due to economic uncertainties.
- Regional or single-country funds concentrate on companies in a particular region or country. These funds may invest in either established or emerging markets, depending on the fund’s strategy. Because they are so focused, these funds may be as risky as an emerging market fund, depending on the region or country.
- International funds generally invest in stocks from established markets, like those in European countries, Australia or Japan. International funds generally hold a variety of stocks from many different countries, rather than specializing in a particular region or country. Because they emphasize developed markets in relatively stable countries, these funds may be less volatile than emerging market or single-country funds.
- Global funds invest in a portfolio of stocks from U.S. and foreign companies. Depending on the rest of your portfolio, a global fund may overlap some of your domestic holdings. This type of fund also may be less volatile than other types of international funds due to its U.S. component, which provides added diversification.
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International Bonds
One way to invest in international bonds is to use an international or global bond fund. International bond funds invest exclusively in bonds issued by foreign governments and corporations while global bond funds invest in a mixture of overseas and U.S. bonds. International and global bond funds are subject to the same types of risks as international stock funds, particularly the risk from currency fluctuation and political instability.
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Risks of International Investing
As with any type of investment, international investing involves risks as well as potential rewards. Some of the risks include:
- Market risk — Like any financial market, international markets may decline in value. In general, overseas markets are considered to be more volatile than domestic markets. And emerging markets are considered the most volatile of international markets due to their susceptibility to extreme political and economic shifts, as well as their uncertain regulatory climate.
- Political risk — Around the world, countries are vulnerable to the forces of political change. Elections, coups, no-confidence votes and other political developments can have significant economic consequences.
- Currency risk — If you invest directly in a foreign stock market or if you invest in a mutual fund that invests internationally, you may be subject to currency risk. Currency risk refers to the risk that your international investments will gain or lose value based on changes in the value of the U.S. dollar relative to foreign currencies. Investment dollars have to be converted to the local currency in order to invest in most overseas stock exchanges. An investment in an international fund may mean that a ber dollar could reduce the value (in the foreign currency) of your investments while a weaker dollar could increase their value.
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The thoughtful selection of international funds to complement your existing portfolio will help you take advantage of the growth available from markets around the world and gain diversification beyond traditional domestic stocks, bonds and cash.
This information is for educational purposes only and is not intended as investment advice.
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