As you go through each day, you probably come into contact with
many products manufactured by foreign companies.
As you go through each day, you probably come into contact with many products manufactured by foreign companies. In fact, from your German coffeemaker to your French yogurt to your Japanese car, you may be contributing, in some small way, to the bottom line of dozens of foreign businesses. So, why not invest directly in them?
Actually, by investing in international stocks, you can gain at least two key advantages:
– Diversification – You may already know how important it is to diversify your portfolio among an array of high-quality stocks, bonds, government securities and other vehicles. By spreading your dollars among a range of investments, you can help reduce the chances of being hurt by a downturn that primarily affects just one asset class. International investments can add to that diversification, because foreign stocks may not always move in the same direction as U.S. stocks.
– Growth potential – The U.S. equity markets may well be the best-known in the world – but that doesn’t mean they are the best performing. In fact, the financial markets in other regions can frequently do better than ours. Of course, it’s impossible to predict which specific area – Europe, Asia, South America, etc. – will be leading the way in any given year, but if you’ve got some international holdings in your portfolio, you can be prepared to take advantage of the foreign markets that happen to be doing well.
Some words of caution
While you may be able to benefit from adding international equities to your portfolio, you need to be aware that these stocks also carry some unique risks. Here are a few to consider:
– Political risk – In the United States, political decisions can have some effect on the stock market. But in some foreign countries, the very stability of the government may occasionally be jeopardized – and that can certainly threaten the fortunes of your investments.
– Currency risk – If you’re going to profit from your foreign stocks, you need them to increase in value – but you also need a favorable currency exchange rate. For example, if you invest in an Italian stock, and it goes up 10 percent, you might think you were doing pretty well. However, if the value of the Euro drops 20 percent against the American dollar, you will lose ground. (Conversely, though, if the dollar weakens against the Euro, you’ll come out ahead.)
– Market risk – Corporate reporting by U.S. companies is strictly legislated – but this diligence does not always exist in the international markets. As a result, some of the information you might get on foreign stocks may not always be as reliable as you’d like. Also, foreign accounting practices may differ from ours, making it somewhat difficult to compare foreign stocks against American ones. While you need to pay attention to these concerns, you shouldn’t let them scare you off from foreign investments. But be prepared to hold your international stocks for the long term – given the added risks involved, foreign equities are not good short-term investment possibilities.
And don’t overload on international stocks – as a general rule, they should make up no more than 15 percent of your portfolio, if that. Finally, don’t go it alone. Just as you’ll gain valuable insights into a foreign country if you have a guide, you’ll learn more about the pitfalls and possibilities of foreign investments when you let an experienced financial professional show you the way.
