Diversification  through Global Investing

Let’s Talk About it!

It’s almost time for the Olympics, and a perfect time to think about your investments on a global scale.I know that there are many questions about the advantages and challenges of international investments. Fortunately for you, I am going to take this chance to answer a few of the most frequent questions I receive when I talk to my clients about diversification through investing internationally.

 Question: Why should I invest internationally?

Listen, we all know that if you want to be successful financially, you have to invest. When we in America think about investment, our fast association is to invest in the American economy. This, however, can occasionally be a little risky. If you’re looking for diversification  to reduce your investment fluctuations in the American economy, then you may want to consider investing in foreign stocks. This strategy assumes that by investing in more than one economy, individuals may be able to “level out” the expected fluctuations that inevitably occur both domestically and abroad. The ever expanding global marketplace has made the purchase of foreign investments much easier for today’s individual investor. An example of foreign investment is in the BRIC countries; Brazil, Russia, India, and China.

Question: Isn’t it riskier to invest in foreign economies that I don’t know much about?

Foreign politics are challenging to grasp, and one can become worried about lack of understanding. When most people think of purchasing domestic stocks, they typically consider any potential risk at least to be familiar, while “foreign” issues often suggest something unfamiliar and, therefore, inherently more risky. However, splitting an equity portfolio between domestic and foreign stocks may be a smart way for investors to help reduce risk and add diversification. One country’s economy may be expanding while another is contracting, which can mean that when prices are declining at home, they may be rising elsewhere. Of course, investments in foreign stocks can involve additional political and economic risks, particularly with respect to currency fluctuations.

Question: What causes these fluctuations in other nations?

 Ironically, one of the factors that can contribute to foreign currency fluctuation is direct and indirect investment from outside the country. When investors see an economic opportunity and purchase stocks, it can create a demand for the local currency that, in turn, can affect its value. Investors who rely on bond income for their living expenses may find this type of potential volatility unnerving.

Question: Why is this a good addition to my portfolio?

At this point, I do not know if this is good or bad for your portfolio. But you must be aware of it as an OPTION.   Adding international investments to your portfolio can possibly provide you with a safety net against inflation as well. When inflation does run higher in the United States, interest rates tend to rise, depressing issued bond and stock prices. During a period of high domestic inflation, the value of the dollar declines because it takes more dollars to buy the same goods and services. The value of currencies of low inflation countries may increase in relation to the dollar because those currencies can be converted into a greater number of dollars. The reverse also holds true: When inflation runs high overseas, foreign stocks and bonds may convert into fewer dollars. As a result, U.S.-issued bonds and stocks may look more attractive.

Question: What type of foreign investments should I try?

 Mutual funds or Exchange traded funds are generally considered to be the most reasonable way for the casual or average individual investor to gain foreign exposure. Global bond funds invest in developed nations, but generally have more than 25% of their assets in domestic issues; international bond funds invest in developed countries, but U.S. bonds may make up a quarter of their holdings; emerging-market funds invest in developing countries and, as a result, may have greater volatility (as well as greater returns). There are also funds that target select countries and specific regions of the world. Investors with only limited foreign equity exposure in their portfolios may want to consider sticking with global funds, since they can more easily shift funds to U.S. markets when foreign markets appear unattractive.

Question: Investing internationally sounds like a pretty safe option, can you guarantee success?

Absolutely not!  Whether looking homeward or abroad, investors should always remember that past performance is not a guarantee of future success; investment values will fluctuate in response to market conditions. As a result, when shares of particular investments are redeemed, they may be worth more or less than their original cost. A thorough review of each fund’s prospectus will provide you with greater insight into the fund’s objectives, risks, and assets under management—whether they’re in the U.S. or abroad.

 

I would be happy to review your portfolio to see if you have the correct amount of international exposure based on on your time horizon, goals and objectives and risk tolerance.  

 

Note: International stocks have additional risks, such as currency exchange fluctuations, different accounting standards, governmental regulations, and economic conditions not present with domestic investments.