Are you traveling abroad this summer? If so, you won’t be alone. Increasingly, Americans seem to have gotten the “travel bug.” In fact, a record number of us — well over one-third of the population — now hold valid passports, according to the U.S. Department of State. Of course, seeing the world can help broaden our horizons in many aspects of life — including how we invest.
In fact, investment prospects now exist in every part of the planet. However, you might wonder why you should invest globally. Aren’t there enough good opportunities right here in the United States?
The U.S. does indeed provide a wealth of investment choices. But you can still receive at least two key benefits from international investing. Let’s take a quick look at them:
• Growth potential — As you know, the United States is a highly developed economy. While that doesn’t that there is no room for growth here you can also find growth potential in emerging markets, which are not confined to any one geographical region. Some of the countries with the greatest increase in stock market capitalization in 2012 were Turkey (60 percent), Thailand (45 percent), the Philippines (39 percent), Colombia (30 percent) and Mexico (28.5 percent), according to the World Federation of Exchanges, an association of international stock market exchanges. And when 2013 draws to a close, we might see other countries on the “biggest-gainers” list, which points out the fluid nature of international investment opportunities.
• Diversification — By investing internationally, you can help diversify your portfolio. The world’s financial markets are connected to each other, but they don’t always move in unison. In any given year, the U.S. markets may be down, but international markets might be doing significantly better. Consequently, if, during that year, you had only invested in U.S. companies, your portfolio could have taken a hit, but if you had spread your investment dollars around the world, your year-end results might have looked considerably different. Keep in mind, though, that while diversification can help reduce the effects of volatility, it can’t guarantee profits or protect against all losses.
Although international investing does provide some key benefits, it also carries some unique risks. For example, when you invest in companies based overseas, you may encounter political instability, which could threaten the financial markets of a country or an entire region. You could also 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. Another possible risk associated with foreign investments is that of liquidity — in some cases, it may be more difficult to sell a foreign investment as quickly as you could sell a domestic one. Therefore, you need to pay particular attention to foreign investments that are, or can become, illiquid by the time you may want to sell them. In addition, investments in emerging markets involve exposure to economic structures that are generally less diverse and mature. There’s also exposure to political systems, which can have less stability than those of more developed countries.
In any case, it’s generally a good idea to hold no more than five to 10 percent of your portfolio in international investments. And, because of the complexities involved with foreign markets, you may well want to work with a financial professional — someone with the expertise and resources to evaluate the pros and cons of international investments.
By looking past U.S. borders for investment opportunities, you can expand your horizons for potential investment success. Bon voyage!
This article was provided by Edward Jones Financial Advisor Iain Marshall. For more information call Iain at (530) 676-5402.