Many investors make the mistake of limiting their investment options to domestic business that are located here in the United States. However, there is a whole wide world of international investing opportunities that lie beyond our shores.
Investing internationally may be beneficial for many reasons, not the least of which is the added diversification it lends to your portfolio. This is especially critical during periods of increased market volatility like we’ve been experiencing recently.
More Diversification = Less Potential Risk
Investors sometimes view international investing as being riskier than investing in companies located here in the U.S. In reality, though, investing internationally can actually help reduce investment risk by increasing diversification.
Worldwide investment markets tend to move independently of each other. For example, the markets in one country or part of the world could be rising while the markets in another country or part of the world are falling. By diversifying your investment dollars among different countries and regions of the world, you could smooth out your overall returns and help reduce the volatility in your portfolio.
Another benefit of international investing is the additional opportunities it offers you to increase your portfolio’s return. More than half of the world’s market capitalization lies outside the U.S. — so if you’re only focused on domestic investments, you are severely limiting your chances of finding the best securities that could help you meet your investing objectives.
What Exactly Is International Investing?
The term “international investing” is often used to describe the purchase of investment securities located in countries other than the U.S. However, this term describes just one of four different categories of overseas investing:
- International investing — All companies in an international fund are located outside of the U.S.
- Global investing — Companies may be located anywhere in the world, including the U.S.
- Regional investing — Companies are located in specific geographic regions. For example, there are funds that only invest in what are known as the BRIC nations (Brazil, Russia, India and China) and funds that concentrate on Europe, Australia and Southeast Asia, which collectively comprise the EAFE Index.
- Country investing — Companies are only located within a specific foreign country.
As the global economy has become more inter-connected, the economies of many nations are starting to more closely resemble each other — or in other words, to be more highly correlated. This makes it harder to realize true overseas diversification in your portfolio.
Therefore, one of the biggest keys to international investing success is finding regions or countries that have a low degree of correlation with the U.S. The BRIC nations tend to fit this description, while the economies of the EAFE nations tend to be more highly correlated with the U.S. economy.
International Investing Risks
None of this is to suggest that international investing is free from risk — far from it. In fact, many foreign countries and regions have highly volatile economies and markets, especially emerging market nations that are experiencing rapid growth and industrialization.
Geopolitical risk (like political instability) and currency volatility are two of the biggest risks accompanying emerging market investments. In fact, currency fluctuations are a factor to be considered with any type of international investment. Returns on your international investments can be impacted (either positively or negatively) by changes in the value of a foreign nation’s currency and the U.S. dollar.
You may be able to reduce the risks of international investing by choosing international, global, regional or country-specific mutual funds and exchange traded funds (ETFs). These funds are run by portfolio managers who specialize in particular nations and regions and are adept at uncovering the best investment opportunities in them.
If you haven’t considered adding an international flavor to your investment portfolio, now might be a good time to do so. Carefully examine the potential rewards and risks of international investing to decide if it’s the right strategy for you.