You’re probably accustomed to measuring the progress of your investments, and the overall condition of the investment world, by checking on indexes such as the Dow Jones Industrial Average and the S&P 500.
And since these types of benchmarks focus almost exclusively on American companies, you might get the idea that the best investments are located right here in the United States.
But that impression would be false — because there literally is a world of investment opportunities beyond the U.S. borders.
In fact, as of the end of 2010, U.S. stock markets constituted less than a third of the total global stock market value, according to the World Bank. And you can probably just look around at the products you use in your daily life to identify many successful foreign companies.
Why invest a portion of your portfolio internationally? Here are a couple of reasons to consider:
• Growth potential — The United States is a mature, highly developed economy. That doesn’t mean, of course, that we have no “upside” here. However, you can also find considerable growth potential in emerging markets — such as China, India, Brazil and Mexico — that are characterized by younger, less mature economies.
• Diversification — The world’s financial markets are somewhat dependent on one another, but that doesn’t mean they constantly move in unison. In any given year, the U.S. markets may be down, but international markets might be doing better. Consequently, if during that year, you had invested only in U.S. companies, your portfolio may have taken a hit. It’s important to diversify your portfolio by investing in many different vehicles, but you can also boost your diversification through geography. (Keep in mind, though, that diversification can’t guarantee a profit or protect against loss.)
While international investing can be beneficial, it does not come without risks.
For one thing, when you invest overseas, you may encounter political instability, which could threaten the financial markets of a country or region. Conversely, financial problems, such as the European debt crisis, can result in loss of confidence in individual governments. Also, you might experience currency risk, which means that changes in the value of the U.S. dollar relative to foreign currencies could harm the value of your investments.
And in any given year, any market, foreign or domestic, may be down.
Ultimately, you should probably limit your exposure to international investments to no more than 20 to 25 percent of your overall portfolio, with the exact amount, if any, depending on your situation — your goals, risk tolerance, time horizon, financial situation and other factors.
You also may want add an international flavor to your portfolio by investing in quality U.S. companies that do a considerable amount of business abroad. In any case, given the more complex nature of international investing, you’ll want to consult with a financial professional before writing a check.
Still, consider the international investment world. With a little exploring, you may discover some good possibilities out there.
This article was written by Edward Jones for use by Evans, the company's financial advisor in Richmond Hill.