Are you traveling abroad this summer? If so, you won’t be alone. Increasingly, Americans seem to have gotten the “travel bug.” In fact, over one-third of the population now holds 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.
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. That doesn’t mean, of course, that we have no “upside” here—we do, and we always will. Nonetheless, you can also find growth opportunities in foreign markets. Which ones? There’s never any one “right” answer. In one year, a particular country—or even an entire region, like the Pacific Rim—might lead the way as far as performance. The very next year, a different country or region could top the list. Since it’s almost futile to try to guess which areas will perform the best in any given year, you’re much better off looking for solid investment opportunities in all regions of the world.
- Diversification. By investing internationally, you can help diversify your portfolio. The world’s financial markets are connected to one another, 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 you had only invested in U.S. companies that year, your portfolio would have taken a hit. However, 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 provides 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.
In any case, you probably won’t want international holdings to ever take up a majority of your portfolio. How much should you own? Again, there’s no right answer for everyone. Your investment mix should be based on your risk tolerance, time horizon and individual goals. 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! iBi
Fran McKay is a financial advisor with Edward Jones at The Shoppes of Grand Prairie.