On Oct. 24, many celebrated United Nations Day. It was an occasion to highlight and reflect on the work of the United Nations, whose mission is to promote understanding and cooperation among the world’s countries.
In an era of instantaneous communications and speedy global travel, we are all connected more than ever before. And that’s certainly true in the financial markets because as an investor, you’ve got a world full of opportunities.
Many people, however, still think the U.S. dominates the investment scene. But the fact is that U.S. stock markets make up less than half of the total global stock market value, according to the Census Bureau.
And that should come as no surprise to you when you consider many of the products you use on a daily basis, from the Hyundai (South Korea) you drove to work to the Nestle Crunch bar (parent company in Switzerland) you snacked on at lunch to the Sony television (Japan) you watch at night.
Not only are many companies based in the developed countries, but some emerging markets — countries such as China, India, Brazil and Mexico that are characterized by younger, less mature economies — are growing rapidly, which may produce good investment opportunities.
Keep in mind, though, that emerging markets do involve investment risks different from those of more developed countries. Securities may be less liquid and more volatile because economic structures are generally less diverse and mature.
And by investing internationally, you can gain another key benefit — improved diversification. If you only invested domestically, and a downturn hits us, your portfolio will likely take a hit. But, at any given time, international markets may perform quite differently than the U.S. market.
Consequently, if you expanded your investment horizon beyond U.S. borders, your foreign investments could be doing relatively well, even if your American investments were lagging.
Diversification, by itself, cannot guarantee profits or protect against loss, though it may be able to help reduce the effects of volatility.
While you can gain some benefits by investing internationally, you’ll also need to consider the risks, such as political risk. For example, new governments can come in, nationalize companies, drastically change policies or rules affecting commerce, or take other actions that could have a big effect on your investments. You might also encounter currency risk — that is, changes in the value of the U.S. dollar, relative to foreign currencies, could negatively affect the value of your investments. Another factor to consider is the difference in accounting standards between the U.S. and other countries, a difference that can result in difficulty analyzing the true value and performance of foreign investments.
You can enhance your portfolio’s diversification without investing a lot abroad. If you are considering international investments you may want to limit the foreign exposure to no more than 20 to 25 percent of your overall portfolio, with the exact amount depending on your individual risk tolerance, time horizon and long-term goals. Also, given the more complex issues involved in international investing, you’ll want to consult with a financial adviser.
Once you’ve done your due diligence, don’t be afraid to launch your voyage to the world of international investing. You might like what you see on your journey.
Scott Flake is a financial adviser with Edward Jones. He hosts regular investment discussions. For more information, call (928) 468-1470. This article was written by Edward Jones for use by your local financial adviser.