If you don’t mind slow trips, you can go around the world in 80 days. But it takes almost no time to become a global investor. So, should you look abroad for good investments?
You may not have thought about it. And that may not be all that surprising, because when Americans check market updates, they typically see data for the Dow Jones Industrial Average, the Standard & Poor’s 500 Index and the Nasdaq Composite, all of which provide information for essentially one asset class: large-capitalization domestic stocks. Yet, U.S. equities actually only represent slightly more than one third of world equities, according to Bloomberg, a financial news service — so if you’re confining yourself to the U.S., you may be missing out on an opportunity.
By investing internationally, you can gain at least two significant benefits:
• Growth potential — U.S. stocks have achieved good returns for long stretches of time. Yet, in any given year, markets in other countries can outperform the U.S. — and they have done just that.* By looking beyond our borders, you can invest in — regions with different prospects for economic growth.
In mature economies, such as those found in Western Europe, you can find investment possibilities in companies that produce high-quality, well-known products. Like many of the best American businesses, these foreign companies are likely to remain competitive far into the future — which means they can be attractive to serious, long-term investors.
• Diversification — If you invest entirely in domestic investments, and the U.S. financial markets suffered a downturn, your portfolio would likely take a big hit. But if you spread your investment dollars between both U.S. and international investments, you could lessen the impact of the U.S.-based volatility. The U.S. financial markets do not always move in tandem with global markets, so, when we’re down, they might be up. (Keep in mind, though, that diversification, by itself, can’t guarantee profit or prevent losses.)
While investing internationally offers some advantages, it also carries some specific risks. Here are a few to consider:
• Political or economic instability — A quick glance at the headlines can tell you that different parts of the world may be undergoing political or economic turmoil — or both at the same time. This instability can obviously affect the investment outlook within these regions.
• Fluctuating exchange rates — The exchange rate between U.S. and foreign currencies fluctuates all the time. This movement can decrease or increase the dollar value of your investment even if its actual price remains unchanged.
• Difficulty in obtaining information — Financial information about specific companies in emerging markets can be hard to obtain, which is why it may be better to invest using professional managers.
Given these factors, if you are going to invest internationally, it’s probably a good idea to do so with the help of a financial professional — someone with the resources and experience to help you avoid potential pitfalls. But don’t ignore the opportunities available internationally. The exact amount depends on your risk tolerance, goals and time horizon.
The world is a big place — investing an appropriate portion of your portolio in international investments could help broaden your investment horizons. Past performance is not a guarantee of future market performance.
Tye Hoffmann is an investment representative for Edward Jones Investments located at 974 N. Main St. in Tooele. He can be contacted at 833-9440 or at 830-0917.