It’s hard to ignore the fact that we live in a global economy. A quick glace around the room is likely to reveal objects created in a huge number of countries, like furniture from Sweden, electronics from South Korea, and décor items from China. What does this global perspective mean for your investment strategy? Should your portfolio mimic your home, with assets from far-flung corners of the world? If so, what are the investment vehicles available to the average investor and what pitfalls stand ready to trip the unwary investor?
First, why do investors strive to add international exposure to their portfolios? The answer is refreshingly simple – diversification and opportunity. Investors seek to diversify their portfolios by adding asset classes that present a variety of unique characteristics, like specific risk, income, or correlation features. Often, investors view international investing as an opportunity to expose their portfolio to asset classes that may exhibit higher growth opportunities, like emerging markets or frontier markets. While the term “international investing” may appear simple, it’s important to appreciate how many investment possibilities actually exits outside of the United States. For nearly every investment class available domestically, there is an international complement. There are large, small, and medium-sized stock indexes, international Real Estate Investment Trusts (REIT), foreign government bonds and bonds issued by foreign companies, and even investments in natural resources. That’s just the tip of the iceberg! The investment possibilities are nearly endless, which can be both a positive and a negative as investors weigh their options.
So, how can investors determine the amount of international exposure appropriate for their portfolio? As with any investment plan, the correct amount depends on a number of factors, including investment experience, investment time horizon, level of wealth, cost, age, and tolerance for risk. Investors should work closely with their advisor to understand the risks and opportunities presented by international investing and to design a well-considered strategy.
Once the amount of exposure has been determined, what are the investment products available to the average investor? Thankfully, investment products come in a variety of forms, many of which are already familiar to most investors. Examples include mutual funds, exchange-traded funds (ETFs), individual stocks and bonds, American Depository Receipts (ADRs), and securities traded on foreign exchanges. Each form of investment comes with its own risk profile and positives and negatives. Investors should evaluate each option carefully to determine the appropriate method to meet their needs.
Now, a word about risk. Investing in international securities exposes participants to potential risks that may not be present in domestic investments. Investors should expect to be impacted by fluctuations in the value of international currencies, political turmoil, changes in international law or taxation, unfamiliar rules or market operations, higher investment costs, and periods of illiquidity. In addition, international investments may not be subject to the same regulations and disclosure rules we use in the United States. While the risks are not insurmountable or prohibitive, they are worth understanding and evaluating on a periodic basis.