Global investment: Is it still a smart strategy?
Despite the developing global economy, some investors still believe that owning U.S. securities is sufficient – that international securities would just duplicate their efforts. But a closer look at economic and market trends reveals numerous reasons for continuing to diversify with investments from around the world.
Unique economic environments – There are still significant differences between countries’ markets and economic sectors. For example, the financial services and energy sectors represent a much larger percentage of international market capitalization than U.S. market capitalization. On the other hand, the technology and health care sectors represent a larger percentage of U.S. market capitalization.
Valuation variations – When international stocks are less expensive than U.S. stocks, value-oriented investors and investors looking to diversify growth-oriented portfolios may find attractive opportunities in foreign markets.
Currency considerations – During the 1990s, the rising value of the U.S. dollar curtailed the returns of foreign investments. More recently, however, the dollar has weakened versus the euro, a trend that some analysts believe could be sustainable. A weaker dollar could enhance the dollar-based returns of foreign investments.
Finally, keep in mind that many of the world’s top companies are headquartered overseas. If you decide to tap into that wider universe of investment opportunity, consider the potential advantages of an international stock mutual fund. Be aware that foreign investments entail special risks, including currency fluctuations and differences in regulations and accounting practices.