You've probably heard lots of advice to invest internationally. What does that mean? International investing is investing in assets sold or issued by a company or country that is not your home country. So someone living in the United States would be investing internationally if they purchased stock in a company located outside the United States. Why would you do that?
The reasons to invest internationally are many. The most crucial being that the world is a large place with many stock markets. Investing in only your home country limits your options. Investing internationally gives you access to many more money making opportunities.
Another reason to invest outside your home country is diversity. A well-diversified portfolio can provide better returns while reducing the overall risk. How does it do that? It does that by including assets that are potentially performing extremely well thereby offsetting ones that are doing poorly. You are avoiding putting “all your eggs in one basket” as the old saying goes.
Avoiding overexposure to one country helps you weather bad economic conditions in that one country. This keeps your portfolio from possibly losing a lot of principal. Also, it provides the opportunity for the portfolio to increase returns by investing in a country doing really well. For example, the United States may be in a recession but China may be booming. Your portfolio's return would have a chance to do better by holding some Chinese assets along with United States assets.
International investing encompasses all the countries of the world but your own. Conversely, global investing is all the countries plus your home country. This distinction is most important when choosing to invest in mutual funds. You want to diversify your portfolio. An international mutual fund that does not include your home country adds diversity if you already have a mutual fund or assets in your home country. The reason for this is that you don't want to be overexposed to your home country assets. Otherwise, a global fund is a fine option.
International investing is divided into developed and emerging markets countries. Developed countries include the United States, the United Kingdom and Europe, among others. Developing countries, also known as emerging markets, include China, Brazil and India, among others.
Developed countries are well-established. They have a solid economy. Emerging Markets are the up and coming countries. They are in the process of fully establishing their economies.
So what are the downsides of international investing? Your international assets can lose money just like your home country assets. Most international investing is done in stocks and bonds. Therefore, they are subject to the same risks as your home country stocks and bonds.
Stocks are subject to stock market volatility. International stocks are also subject to individual country risk from such problems as political upheaval in the country. They are also subject to currency risk. Currency risks occurs because the money you invest is converted to the currency in which the stock is trading. You could lose money since this exchange rate fluctuates.
Bonds are also subject to currency exchange risk. In addition, they are subject to interest rate risk which is the risk that interest rates will rise. They are also subject to credit risk. This is the risk that the issuer will default on the bond thereby not paying the interest or the principal.
International investing can be done through purchasing individual stocks, individual bonds, mutual funds or exchange-traded funds (ETFs). It is wise to diversify your international investments. You can buy international index funds or ETFs which will track an index of international investments.
The addition of international assets to a portfolio can increase return while diminishing risk. The world is a large place with many economies. Adding some exposure to these economies has the potential to improve your portfolio.
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