Diversifying with International Investments
Pro tips on profiting with non-US investments
Andrew Horowitz
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Diversifying with International Investments
Today on Money Girl Voy hablar de, international investing.
Did you know that the key to investing is a diversified portfolio? You want a mix of stocks, bonds, property, and foreign currency to be able to make it through the rough markets unfazed.
Did you know that international investing is the key to many people’s investment wealth? Some financial advisors may become wary when you bring it up, but international investing is very important to the disciplined investor. Sure, there are risks, but there are risks in domestic markets as well. It’s just a matter of doing the research and understanding the possibilities for the downside –then weighing those risks against your investment needs. Sound familiar?
It does to Kimberly from Santa Monica who writes in and wants to know more about the pros and cons of international investing…
Foreign?
Kim… I want you to remember, international investing is really about perspective. Investing in European stocks is only international investing if you are not European. Have you ever thought that investing in the stocks of the Dow Jones as international investing? Well, it is for investors in Argentina!
Benefits of International Investing
Here is why international investments are so important.
Strong growth. Over the past thirty year, annual returns for the index that tracks the major international stock markets have done better than the our market 16 out of 30 years. Emerging markets typically have double or triple digit returns.
The falling dollar. Maybe more important is the fact that the US dollar has dropped in value against almost every major currency over the past five years. This means that earnings in foreign currencies are worth more for those US-dollar-based investors when they withdraw their funds.
Diversification. Also the range of industries available for investment adds more to your diversification than simply investing in what is currently for available in the United States. So, if you like investing in alternate industries and diversifying your risk, investing internationally might be for you.
Mutual Funds
Let’s start with this tip: I suggest that most investors look to mutual funds when investing abroad. This is because there are a variety of different mutual funds that encompass basically everything most investors should need. There are funds that specialize in stocks, those that specialize in bonds, one for bonds and stocks, and still others for money market funds.
Among these mutual funds there are geographic breakdowns for what different companies will handle and control.
Global Funds. There are global funds that look for smart investment opportunities worldwide but often end up putting a good deal of their investments in the US market. International funds, of course, only invest in foreign markets.
Emerging market funds. Emerging markets, like Latin America and Eastern Europe can offer a promising returns but are volatile.
Regional funds. Regional funds target specific areas such as Asia or the European peninsula.
Lastly, there are country funds, which do exactly what they sound like, focus on specific countries for investment.
Risks
Just like domestic markets, foreign investments are at risk when market values decline, interest rates change or a creditor defaults. However there are also some other risks one must consider investing with this strategy.
Currency risk. There is often currency risk–this is when the value of the dollar changes in comparison to the foreign currency and can effectively erase all of your gains. A few mutual funds will try to protect against this by neutralizing any loss due to currency exchange risk but that also means they may call it wrong.
Political, social, and economic risk. The political, social and economic risks in foreign countries are also a concern because foreign governments have been known to impose high taxes on international withdrawals and seize corporations for governmental property. Also most foreign countries don’t have the same regulations that the US does regarding transparency so, obtaining pertinent information can often be difficult.
Despite the risks adding international investments to your portfolio can help to greatly increase your diversification and potentially your gain while only adding incremental risk. Of course, read all of the materials carefully and only invest if you know what you are getting yourself into.
Cha-Ching …and that’s all for now. Courtesy of Andrew Horowitz, guest host of Money Girl’s Tips for a Richer Life. Thanks for tuning in to “Money Girl”. This is Andrew Horowitz sitting in for The Money Girl. Listen to my weekly podcast…The Disciplined Investor also available on iTunes.
And, for sending in a question that helped with today’s episode, Kimberly is going to get a copy of An American Hedge Fund: How I Made $2 million as a Stock Operator by my friend Timothy Sykes. Thanks again Kimberly…
As always, everyone’s situation is different, so be sure to consult a tax or financial advisor before making important financial decisions. This podcast is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice.
Thanks for listening!
Additional Reading:
Morningstar’s International Investing
SEC – International Investing
MSN – World Market Update
Euro image courtesy of Shutterstock