We all know not to put all of our eggs in one basket when it comes to investing it is usually beneficial to hold positions in a variety of financial vehicles (stocks, bonds, cash, real estate, etc.), markets, industries, and even countries. Like purchasing fine art or cash value life insurance, participating in International stocks or funds may be a great way to bring diversity and new opportunities to your portfolio.

For those who are interested in going global, it is important to have a clear and consistent investment strategy. Will you purchase stocks, invest in a fund or pick up bonds in a multinational company? However you decide to enter the international market, work with your trusted financial advisor or broker to develop a plan which can protect you from extreme losses (as much as is objectively possible) while directing you toward well defined financial goals.

There is no one single way of being successful in international investments. To devise a strategy which will fit your personal risk tolerance and goals, you will first need to decide whether to pick stocks by yourself, invest in a fund or both. While some investors enjoy spending time doing their own research and making their own decisions as a day trader, others prefer to (actively or passively) leave the stock picking to a knowledgeable fund manager or broker.

Whether you are a DIY investor or working with a broker, when considering foreign investment opportunities, do your homework. For a thorough analysis, you will need a basic understanding of the markets and international trading fundamentals. Additionally, you will want to stay abreast of the economic, business or political risks at play. Set appropriate targets along with stops to protect your capital. Finally, monitor your performance to ensure your total portfolio risk and asset allocation is still in alignment with your goals.

Investors can gain appropriate exposure to these global opportunities while mitigating the risks through several viable investment options. Lets take a quick look at some of the various ways you can become an international investor, as well as some of the pros and cons of using funds or stocks to enter the market(s).

3 Simple Ways to Become an International Investor

1 Stock Ownership in Foreign or Multinational Companies

Some people enjoy day trading or prefer self-managing their portfolio to hold customized positions. One simple way for these investors to participate in the global market is through foreign or multinational companies that have significant operations in the region, country or sector of interest. Foreign companies may give you direct access to the market opportunities of your choosing, while the multinational companies may give you exposure to growth opportunities without having to take on the risk that comes with dabbling in emerging markets.

For example, Intel Corp. (INTC) is a global company that makes a large portion of its sales outside of the U.S. As a strong performing company with the largest market share of CPU processors around the world, buying stock in Intel may provide some protection from risk relative to their involvement in emerging markets or regions.

If, however, you are bullish about China and India, but concerned about a market slump in Europe, a multinational company may not be the way to go. There is no guarantee your assessment of China and Indias markets is correct, but to avoid exposure in certain markets, buy equity in companies operating only in the country, region or market of your focus.

2 Mutual Funds with Diverse International Holdings

International mutual funds offer two big advantages for small investors: access to professional knowledge and instant diversification. When you invest in an international mutual fund, you are purchasing a portion of a larger, diverse portfolio of assets. Some may be a mixture of domestic, international and multinational positions, while others may be designed to focus on certain markets, asset classes, regions, etc.

All of the investment and administration decisions are made by portfolio managers. With guidance, each investor can choose to actively communicate with their broker or portfolio manager to buy, hold, or sell their positions to reach certain goals or passively gain exposure without needing to micromanage in the short-term. Regardless, you will receive account statements, which include information on the tax status of any capital gains and dividends you receive.

A mutual fund offers investors diversification to help reduce the risk of loss associated with any single investment. While diversification cannot eliminate risk entirely, it smoothes portfolio performance during periods of market volatility common in emerging markets or regions of socio-economic upheaval yet rich in resources.

Mutual funds also offer investors liquidity, so that any or all of your shares can be redeemed on any business day. Funds are priced once per day, at the close of business. Everyone purchasing the fund that day gets the same price, regardless of the time of day their purchase was made.

3 Regional or Country Specific Exchange-Traded Funds (ETFs)

Another way to invest in foreign markets is through an indexed mutual fund, which unlike a regular equity fund, tracks the performance of an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. These exchange-traded funds (ETFs) experience price changes throughout the day as they are bought and sold.

While its as easy as buying stock in a mutual fund, investors must still do their homework. It is important to understand the characteristics that comprise the index. In the case of a foreign ETF, investors may be surprised at the company stocks that make up the index.

ETFs offer the investor the diversification of a mutual fund, with the flexibility of an indexed fund which can be traded intraday. The ability to bet on the direction of shorter-term market movements through the trading of a single security, as well as the ability to sell short, buy on margin and purchase as little as one share draws many speculative investors.

For example, if the S&P 500 is experiencing a steep rise in price through the day, investors can try to take advantage of this rise by purchasing an ETF that mirrors the index (such as iShares Core S&P 500), hold it for a few hours while the price continues to rise and then sell it at a profit before the close of business. Investors in a mutual fund that mirrors the S&P 500 do not have this capability by nature of the way it is traded, a mutual fund does not allow speculative investors to take advantage of the daily fluctuations of its basket of securities.

Buyer beware however. Just because an index fund says it corresponds to the market of your choice, this does not necessarily mean that the companies reporting on that index are solely from/operating exclusively in the region or heavily dominated by specific industries. For example, the iShares MSCI Mexico Index Fund is dominated by a few companies which also trade on the New York Stock Exchange. And while the iShares MSCI Pacific ex-Japan Index Fund offers a very specific regional focus, it may be comprised of mostly banks. In the end, it is important to review all of the details of the funds, otherwise investors may not be getting the diversification or foreign exposure they were expecting. Thankfully, ETFs are pretty simple to understand.

The Pros and Cons of Participating in International Markets

Investing in foreign markets provides the opportunity to participate in exceptional gains from rapidly growing economies. It also gives investors an additional way to diversify their portfolios. While the opportunity for returns is high, there is a varied level of risk with each of these markets and companies.

Currency Fluctuations: As foreign currencies become stronger or weaker than your local currency, the value of a return will vary accordingly. If the rates go your way, your returns will increase. If they go against you, it decreases the value of any return on investment from a foreign holding.

Political Risk: Political stability of the countrys government can have a significant impact on the value of your investment. Laws may be restrictive or rewarding. Assets may risk being nationalized and even principles lost. Economic inflation can harm your investment. Emerging stability may bring high returns for high risk stakes.

Unbalanced Asset Allocation: While investing in foreign indexes can help you to diversify your portfolio, it can also cause you to concentrate in one industry, company or country. Also, a number of the foreign indexes are capitalization-weighted, meaning that a disproportionate amount of their capital may be concentrated in a few countries or stocks; this limits your ability to balance risk among a variety of asset classes and styles.

Expensive Service Fees: Some ETFs can be an expensive investment in comparison to their cost advantage. While 20 to 60 cents per $100 invested may not seem like a lot; a $100,000 investment in such funds could cost over $20,000 in fees (assuming 10% annual returns over 15 years).

Do Your Homework and Get Professional Advice

As global trade continues to expand and the worlds economies grow, investors will have new and exciting opportunities to generate wealth. The key to developing a long-term foreign investment strategy is to set goals, be aware of the risks and methods for entering the market, and discuss options with a trusted financial advisor before making an investment decision.

Think of your international portfolio as an extension of your domestic portfolio; it likely contains stocks, bonds, or a combination of both that you adjust over time according to your goals. Similarly, your international allocation should reflect your risk tolerance and timeline for reaching specific investment goals.

It is imperative for you as an investor to get professional advice about your particular situation and plans before committing to anything and, in the worst case, to avoid financial ruin. Not everyone benefits from moving their money into foreign markets or companies. In many cases, there are other, feasible alternatives to help you reach your investment, savings and retirement goals. Weigh your options, get expert advice and choose to balance your investment portfolio with the assets that make the most sense for your personal situation and financial goals.

Remember to speak with your financial, legal or tax professional for more information about the topics which interest you.

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