Expanding Horizons: The Power of International Investing
International investing involves selecting global investment instruments as part of a diversified portfolio. Investors often look beyond their home markets to increase diversification and spread investment risk among a wider array of markets and companies worldwide.
Key Takeaways
- International investing means holding securities issued by companies or governments outside an investor’s home country.
- Through global investment, portfolios are more diversified and may enhance returns and reduce portfolio risk.
- Owning foreign assets exposes investors to unique risks such as changes in exchange rates, foreign interest rates, and geopolitical events.
The Impact of Broadening Your Investment Universe
International investing provides investors with a broader array of opportunities, potentially adding new sources of return and mitigating risks tied to a single economy. This expansion into global markets can diversify an investor’s portfolio beyond domestic investments, touching areas such as stocks, bonds, mutual funds, and more.
While diversifying internationally is widely recommended by economists and financial advisors, many portfolios still lean heavily towards domestic securities.
Exploring International Investment Options
When venturing into international markets, investors encounter a diverse spectrum of choices including government debt and global equity indexes.
International Government Debt
Governments across the world issue debt instruments like notes and bonds to manage their fiscal needs. Maturity and interest rates vary based on the issuing country’s financial health and economic status, whether they’re from developed, emerging, or frontier markets. Developed countries typically pose less investment risk, while emerging and frontier markets offer potential for higher returns amid rising economies.
Credit ratings from notable agencies provide insight into the risks of these government debt investments. Investors can refer to these ratings to make informed decisions.
International Equity Indexes
Equity markets feature indices that reflect the performance of stocks from a multitude of countries. Comprehensive exposure to global markets can be achieved through world index funds. Notable indices include the FTSE Global All Cap Index and the Vanguard Total World Stock Index Fund.
Different categories of equity indexes, such as those for developed, emerging, and frontier markets, help investors gauge risk levels and growth potential. MSCI offers several global indices, including the MSCI All Country World Index, MSCI EAFE Index, and MSCI Emerging Markets Index.
Navigating the Risks of International Investing
All investments entail some degree of risk, and international investments bring specific challenges such as:
- Currency exchange rate fluctuations
- Market value changes
- Variations in foreign interest rates
- Political, economic, and social instability
- Lower liquidity
- Limited access to crucial information
- Differences in market operations and regulatory environments.
With a clear understanding of these factors, investors can cautiously navigate the world of international investing, balancing risk with the potential for rewarding global diversification.
Related Terms: foreign exchange risk, price risk, global equity indexes, government debt, currency exchange.
