Like foreign travel or cuisine, international investing can be a great way to diversify your portfolio and discover new opportunities that you otherwise might have missed by sticking close to home. Once you’ve decided to go global, one of the first decisions you need to make is whether to pick stocks by yourself or invest in a fund.
The answer will depend a lot on your personal approach to investing. While some investors like to do their own research and make their own decisions, many others prefer to let a professional fund manager do the stock picking.
There’s no single “correct” answer for everyone. In fact, many successful investors own both stocks and funds. The most important thing is to have consistent strategy – and stick with it. The last thing you want is a random collection of stocks and funds without a clear idea of what you’re trying to accomplish.
Let’s take a quick look at some of the pros and cons of using funds and stocks for your international investments.
International mutual funds offer two big advantages for small investors: access to professional management and instant diversification.
When you invest in an international stock fund, you are buying a slice of larger, more diverse portfolio than you could ever hope to assemble on your own.
What’s more, all of the investment decisions are made by portfolio managers with experience in global markets. Many fund management firms have teams of research analysts located all over the globe.
With the case for fund so compelling, why would anyone need to pick their own international stocks?
One reason is the ability to customize your portfolio. Buying a fund is like buying a suit off the rack. While there are a lot of different choices available, you don’t have any say in how the suits are made.
Here’s an example. Let’s say you’re bullish about China, but you’re not so optimistic about Europe. Buying a diversified international fund won’t allow you to implement this sort of strategy.
Instead, your fund manager might be heavily invested in Europe and have no exposure to China at all. And since funds are only required to report their holdings twice a year, you’ll never know exactly what your fund manager is buying until it’s too late.
Of course, this isn’t necessarily a bad thing. After all, your fund manager may be right and your research may be wrong! In that case, you’d be glad he or she invested in Europe instead of China. But it's important to remember that most of the decision-making is out of your hands when you buy a fund.
A second argument for picking stocks instead of funds is the cost. Mutual funds charge annual management fees for their efforts – and they aren’t cheap. The average international fund incurs annual expenses of about 1.5% of fund assets. So when you invest $10,000 in a fund, $150 goes into the manager’s pocket each year.
That might not sound like much, but if you’re investing for a long horizon, those fees can add up to serious money. When you buy individual stocks, however, you pay the brokerage commission once and then you’re done until you decide to sell.
If you’re an absolute beginner, a good diversified international mutual fund is your best bet. But as you become more comfortable with investing overseas, you may want to add some individual stocks into the mix as well.