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 on American companies, you might get the idea that the best investments are located in the United States. But that impression would be false because there are, literally, 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.
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:
Growth potential — The U.S. is a mature, highly developed economy. You can find considerable growth potential in emerging markets — countries such as China, India, Brazil and Mexico.
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. 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.
While international investing can be beneficial, it does not come without risks. When you invest overseas, you may encounter political instability, which could threaten the financial markets. 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 depending on your situation.
You may also want add an international flavor to your portfolio by investing in U.S. companies that do business abroad.
In any case, given the more complex nature of international investing, consult with a financial professional before writing a check. With a little exploring, you may discover some good possibilities out there.
Ross Hage is a financial advisor with Edward Jones. For more information, call (928) 468-2281. This article was written by Edward Jones for use by your local Edward Jones financial advisor.