Fidelity Investments

Why Invest In Foreign and International Stocks?

Investing in foreign assets refers to the process of buying and selling international stocks, bonds, mutual funds, ETFs and other investment products. The reason we should invest globally or have representation of foreign assets in our portfolios is to make sure that we keep our investments diversified. There may be many financial opportunities that can be found in both developed and developing countries: in developing nations and emerging markets, there’s the potential to earn higher returns due to the higher risk that these areas pose. Note, however, that there’s also much more volatility found in foreign markets.

Now even though the risks for investing in foreign markets are high, there are benefits to making such investments including:

• Portfolio diversification. Investing money in companies and markets that are not based in the U.S. provides for greater protection against losses associated with domestic market downturns. Your investments will have more of a chance to produce consistent returns if spread among independent markets since not all markets move in the same direction at the same time. There have been a lot of studies made that show how international asset classes do not correlate well with domestic asset classes, making it a good idea to have representation in all these areas in your portfolio. Correlation simply refers to the behavior of an investment: well correlated investments mean that they behave similarly throughout time. Look to own diverse investments that perform differently and whose performance is based on different factors.
• Growth. The potential for growth in foreign markets is generally greater than with U.S. markets, especially in emerging economies.

Of course, there are risks associated with international investing. These include:

• Currency conversion rates. Because you cannot invest in foreign markets with the U.S. Dollar, you must accept the fact that currency conversion rates will affect your profit or loss. The effects are not always negative, but due to the highly volatile nature of the currency markets, you can expect to experience some losses along the way thanks to conversion rates.
• Dramatic market changes. Just as the U.S. market experiences drastic changes in value, so do international markets. In some cases, these fluctuations can be even more dramatic thanks to social and political climate changes and economic conditions. The best way to avoid losing money due to volatile market conditions is to invest for the long term.
• Lack of information. The Securities and Exchange Commission, or SEC, regulates how publicly traded companies divulge their financial condition and what information they are required to report. Many foreign companies have no such regulation and the results that they do publish may be inaccurate or may even be in a foreign language.
• Expense. Investing in foreign securities is usually more expensive than investing in domestic securities. For instance, brokerage fees are usually more expensive when you trade international assets, and you may have to pay a premium price for the security itself. Tax structures are also different in foreign countries, where taxes may be levied on dividends before they are distributed.

Before you consider investing in foreign markets, take the time to do your homework and learn as much as you can about the markets and securities that you want to invest or trade in. Then, locate a broker who has expertise in this area. You can do this through a full-service broker or through a discount online broker. but be aware that most discount brokers allow traders to make their own decisions concerning their investments. If you are a novice trader or someone who prefers a more hands-on approach to investing, it may make more sense to engage a full service broker.

Some great articles on the topic of international investing: