When it comes to investing, too many Americans are homebodies; they prefer to invest exclusively in companies based in the United States.
This pronounced bias towards homegrown companies, however, can prevent investors from discovering promising opportunities elsewhere. Investing exclusively at home means foregoing roughly 47 percent of all globally available stocks.
Here are five things you should know about investing overseas.
1. Investing in foreign markets provides diversification.
To lower risk, smart investors diversify their portfolios among large and small cap stocks, bonds and cash. Since these assets don’t always move together, the mix will reduce the chances that your entire portfolio will take a tremendous hit all at once.
Investing in foreign stocks adds another layer of diversification. When the stock market is struggling in the United States, stocks in European countries or the developing world may be doing well.
2. Select the best vehicle for foreign investments.
The safest way to invest overseas is through mutual funds and exchange-traded funds (ETFs). Mutual funds and ETFs provide far more diversification than you could possibly obtain by buying individual stocks overseas.
3. Understand the different types of overseas mutual funds.
Global funds invest in both domestic and foreign stocks. International funds typically invest only in foreign companies. Regional or country funds invest primarily or exclusively in companies located in a particular geographic area.
International funds can invest in developed countries and/or emerging markets. Developed markets include countries like Canada, France, United Kingdom, Germany, Australia and Japan.
Emerging markets, which are more volatile, but can potentially generate higher returns, include countries such as China, Brazil, Vietnam, India, and Egypt.
4. Invest in low-cost funds.
The advice here isn’t any different than what we give for investing on our own soil. While you can’t know how any investment will do in the future, what you can absolutely control are your investing expenses.
Selecting a foreign stock mutual fund with low expenses will help you keep more of the gains. A proven way to keep costs low while investing overseas is to select international index funds.
5. How much to invest overseas.
What percentage of your portfolio you should invest overseas will depend on your risk tolerance and your time horizon.
We can help you decide the appropriate amount of foreign exposure for your portfolio.