International investing is a subject that covers a lot of ground - quite literally the whole world. But there are a few key things that you need to know before getting started. Here are the top five things that I think every investor should know about international markets:
1. International Investing Can Boost Your ReturnsThe U.S. may have the world's biggest stock market, but it isn't always the top performer. At any given time, there are plenty of other markets around the world that are delivering better returns - and in some cases dramatically better than the U.S. When you limit your search to just one country, you're guaranteed to miss out on some great investments off the beaten path.
2. Global Diversification Can Reduce RiskA common misconception is that international investing is "risky". Indeed, putting your retirement savings in say, Nigerian stocks or Turkish bonds, is a dicey proposition. But so is betting heavily on a small-cap stock located right in your hometown. The key is diversification. Numerous studies show that adding a well-diversified basket of international stocks to your portfolio can reduce volatility. That's because foreign markets tend to zig when the U.S. market zags. The net effect over the long run is a much smoother pattern of returns.
3. It's Never Been Easier for Small Investors to ParticpateNobody said international investing would be "easy". As with anything else, you need to do plenty of homework before investing a penny. But international investing has never been more accessible for individual investors. Thanks to an explosion of new international funds, exchange traded funds (ETFs), and American Depositary Receipts (ADRs) you can now invest in countries that were once only available to professional investors - all with a few clicks of a mouse.
4. Don't Forget About CurrenciesInvesting in foreign markets differs in one very important respect from investments at home: the currency impact. When you buy shares of a U.S. company (or wherever your "home" market may be), your return depends on the change in the stock price and the dividends you receive, if any. But if you invest in Japan, you also need to pay attention to the value of the yen. A big change in the exchange rate can have a positive or negative impact on the performance of your investments, and on your portfolio as a whole.
5. All Investing is Global In the age of globalization, the line between "foreign" and "domestic" investing has become increasingly blurry. Some classic American companies, like Coca-Cola and IBM, now generate more than half of their sales overseas. In some industries, such as automobiles and pharmaceuticals, many of the biggest players are located overseas. So even if you choose to invest exclusively in the U.S., you still need to be aware of what's going on in foreign markets. The stocks in your portfolio may be American, but chances are they have some tough competitors abroad. No investment analysis is complete anymore without looking at the global picture.