Because foreign markets don’t necessarily move in tandem with the U.S. market, foreign investments may help diversify your portfolio and reduce volatility. When the domestic portion of your portfolio is down, the international portion may be up, and vice versa.
In addition, investing in foreign stocks – particularly in emerging markets – may increase a portfolio’s growth potential. For example, with more than a billion consumers who have not yet discovered cyberspace, China may be a huge potential market for computer software and hardware companies as its economy evolves.
A Look at the Risks
Foreign investments are subject to the same risks as domestic ones, including the risk that an individual company, industry or the economy as a whole will falter. However, foreign investments involve additional risks, including the possibility of political or social unrest, unfavorable tax laws, economic problems, differences in accounting procedures, lack of liquidity (the ability to convert your investment into cash easily) and currency fluctuations.
Choosing What’s Right for You
If you decide you do want to invest part of your portfolio in foreign markets, consider whether you would prefer the moderate risk of established markets (such as Europe) or the greater risk (and relatively greater growth potential) of emerging markets, such as Southeast Asia.
What Do Currency Fluctuations Mean for Foreign Investments?
The value of the U.S. dollar against other currencies affects different industries and sectors of the economy differently. For example, a strong dollar (the dollar’s value is rising in relation to other currencies) buys more units of a foreign currency. That means U.S. goods become more expensive for overseas consumers (hurting exporters), but foreign goods become less expensive for U.S. consumers. The same is true for investments – U.S. investors may be able to buy foreign stocks and bonds for less because their dollars are worth more.
When the U.S. dollar is somewhat weak, its value is down compared with other currencies. Because it takes more U.S. dollars to buy goods, stocks and bonds overseas, it is more expensive for U.S. investors to buy into foreign markets.
There are a number of different indexes depending on the region. You can find a range of
major world indexes on Yahoo Finance.*
* Web site is provided for information only. No endorsement is implied.