With today’s wars, ethnic strife and oil prices, you might think global investing would be mostly rough sailing these days. Not so, according to global-investment managers who can point to plenty of opportunities for solid growth in overseas markets: Part of the trick is to keep your eye on corporate performance — and not let the noise of external factors drown out what’s good there.
Why invest internationally?
International markets are very diverse, and many have tremendous growth potential. Several large steel, electronics and automobile companies are based overseas. If that isn’t enough, consider these reasons to add international investments to your portfolio:
* Increased opportunities. Large portions of the world’s equities are international. By investing outside of the United States, you expand your pool of potential investment opportunities.
* Eggs in more than one basket. Because foreign markets can be influenced by different factors than U.S. markets, international markets sometimes zig when U.S. markets zag. When you diversify your portfolio with international investments, you spread your risk among markets and might decrease the impact of market volatility. (Keep in mind, however, that some evidence suggests economic globalization is causing major markets worldwide to move more closely in synch.)
* Performance potential. While past performance is no guarantee of future results, over the long term the average performance of international stock markets has stood up well next to that of the U.S. stock market.
Risks of international investing
Of course, along with the potential upside, international investing brings risk. In particular, it has risks not usually associated with domestic investments, such as:
* Political and economic risk: Some countries have a high risk of political or social instability, which could affect the value of investments in those markets.
* Regulatory risk: Many countries lack the high standards for accounting and financial reporting we expect in the United States. This could mean information you get about an investment is incomplete or inaccurate. It also makes comparing investments hard, since they may be subject to different reporting standards.
* Currency risk: When you invest in a foreign market, your investment is denominated in a foreign currency. Fluctuations in the value of that currency against the U.S. dollar could add to the volatility of your investment. For example, when the U.S. dollar strengthens against the foreign currency, the foreign investment decreases in value. As a result, even if your investment performs well, currency risk could cause it to lose value.
There’s an option, of course, to hedge this risk by trading on the foreign exchange markets.
International Investing Conclusion
Investing abroad can expose you to risks associated with exchange rates, political or economic instability, and differences in reporting and tax regulations, but because foreign markets lack direct correlation, investing outside the U.S. can be an effective way for investors to reduce portfolio risk while enhancing risk adjusted returns.