To maintain your current buying power, you need a certain amount of international exposure.
For international investments there are many great global companies producing world-class products and that spells opportunity!
Concentrating all your invested capital in your domestic markets means you’re ignoring the rest of the world’s international investment opportunities.
We are in an environment of global companies and global consumerism. Every investor should have a portion of their portfolio invested globally too.
But what may be the most compelling reason of all to invest in foreign markets is that international investments have an unusual effect on diversified portfolios.
They reduce the overall risk and increase the potential returns!
Because the markets can move at different times and at different speeds, foreign stocks can smooth out the bumps in your domestic portfolio. They actually improve your portfolio’s performance over time. Even as world economies become more interdependent and inter-related, many analysts think this state of affairs is likely to continue.
In addition, all world currencies –whether U.S. Dollars, Japanese Yen, or Euros for example — fluctuate in value when measured against one another.
When you buy stock in a foreign company, you buy the shares with that country’s currency, after converting your currency to the currency at the going exchange rate. When you sell, you get paid in that country’s currency, and you then must convert that currency back to your currency, at the going exchange rate.
If the exchange rate is significantly different between the time you buy and the time you sell, it can add to–or reduce–whatever return you earned on the stock itself.
In some cases, the change in currency values can be more significant to your total return than the actual appreciation or depreciation of the particular stocks you purchased.
If your currency (X) weakens in value against another currency, you make money on the currency exchange, because each unit of foreign currency translates into more Xs.
If X strengthens against another currency, you lose on the currency exchange because each unit of foreign currency translates into fewer Xs.
Currency risk isn’t the only worry. Investing directly in international markets can be prohibitively expensive and inconvenient if you try to do it alone. Fees sometimes are high and there are many delays in transferring funds.
After you decide which country is best for you, the only question is how much money you want to invest. There’s no easy answer, but we do advice individuals to dedicate anywhere from 5% to 25% of their portfolios to international investments.
The more time you have, the more exposure you can handle in volatile, but potentially rewarding, foreign markets!