Why You Should Invest in International Markets
International markets are frequently in the financial news. Companies with household names reap the benefits of international operations as the world of business grows more connected by the day. If you’re still holding a portfolio of only U.S. equities, here’s why it’s worth the effort to get in on some overseas investment action.
Any equity you hold comes with a host of risks relating to the particular company and its line of business. For example, if your entire portfolio were allocated to video rental companies when internet streaming hit the scene, you would experience a serious downturn. Purchasing a basket of many different kinds of companies can minimize this kind of exposure. Additionally, if another industry sees a great deal of return, you’ll miss out. By allocating your portfolio, you’ll minimize risk and expose yourself to more opportunities for growth. These are the benefits of diversification.
Some risks are tied to politics and international factors like war or trade deals. Just as investing in only one company unnecessarily exposes you to risk, so does investing in just one country. If you’re an investor in the U.S., this kind of risk is considered to be very low. However, about 51 percent of the global equity market is located outside of the U.S. It doesn’t take an analyst to guess that you might be missing out on some possible opportunities for growth.
Investments overseas are accompanied by higher volatility than U.S. equities, as well as numerous fees due to the complicated legal nature of investing internationally. Additionally, the currencies that foreign equities are denominated in are prone to fluctuation against the U.S. dollar. For example, if the value of a Japanese company doubles but the dollar cost of yen falls 50 percent U.S. investors in said company won’t realize any gain. This is called currency risk.
Despite these adversities, most experts would agree that, over the long term, some level of exposure to foreign markets is more beneficial than domestic investment alone. However, the optimal amount of allocation is often debated. You’ll have to do your own research to determine what level of foreign investment best aligns with your financial goals.
How to Invest
There are countless ways to invest internationally. Listed below are some of the most common for the average retail investor.
- Mutual funds: Foreign funds are a “file and forget” solution. There are many funds to choose from, and you can decide on which one has a management strategy that you think will be successful.
- Brokers with seats on international exchanges: Some of the top U.S. equity brokerage services will allow you to purchase foreign equities directly on an overseas exchange, such as the Tokyo Stock Exchange or London Stock Exchange. This is a great option for investors who want to micromanage.
- American depositary receipts (ADR): If you’re just interested in one or two foreign companies and otherwise intend to keep your holdings domestic, ADRs are a convenient way to achieve your goal. ADRs are traded over-the-counter in the U.S. and represent a share of a stock traded on a foreign exchange.
As always, before making a serious equity purchase, do your due diligence to convince yourself that you’re making the right decision.