Money & Finance: Take Your Money Global and Reduce Your Risk

Given the news coming in from overseas, particularly from Asia, you might be wondering whether it’s prudent to invest overseas.

March 1, 1998

If you're an independent contractor who doesn’t have a company-sponsored pension or 401(K) plan, don’t let media accounts of the Asia crisis scare you from making any international investments. Diversification is the key to reducing the volatility and exposure in your portfolio, and international diversification could potentially increase your portfolio's total return and help reduce risk.

Today 96 percent of the world's population, 75 percent of total production, and 59 percent of the global stock market's value lie outside the United States. Investing in these other expanding markets broadens your exposure to a wider range of industrial, demographic, and geographic attributes and trends.

The U.S. markets have had terrific performance in recent years, but there are other markets that have turned in even stronger performances (see “The Boom Abroad”).

Risks and Rewards of International Investing

All investments don’t move in the same direction, by the same degree, at the same time. So the more you spread your risks, the more likely you are to invest in the best-performing assets, and the less you stand to lose from any underperformers. By reducing your exposure to the U.S. market you may lessen the risk for your overall portfolio.

Understanding the following factors that influence performance could help you capitalize on potential opportunities and identify potential risks.

  • Market risk—The performance of a fund that specifically invests in companies of one country or region of the world depends on the fundamentals of those companies.
  • Currency risk—For non-U.S. investments, changes in the value of the underlying investment are reflected in the base, or local, currency, but your investment's share price is quoted in U.S. dollars. So a strong dollar will tend to have a negative impact on the performance of a non-U.S. investment, and a weak dollar will tend to have a positive impact.

For the overall performance of a non-U.S. investment, movements in the stock market and the exchange rate could offset or reinforce each other.

Other risks often overlooked by investors are political and economic uncertainty. In addition, certain foreign markets may be more volatile or less liquid than the U.S. market, and regulatory and disclosure practices often differ from what we take for granted here. International investing may not be for everyone.

Where to Begin

If you're ready to dip your toe into international waters, you can diversify your portfolio internationally with mutual funds or closed-end country funds (funds that have a limited number of shares available and trade on the exchanges instead of being listed in the mutual fund section of the newspaper).

Such funds are a particularly appealing choice because most require a minimum amount to get started—often $1,000—are professionally managed, and allow you to participate in a broad spectrum of stocks in a specific country or region.

Also, should you decide that you want to move your assets out of the foreign fund to another area, you'll have a choice of other mutual funds managed by the same organization that you can switch to, often at no cost.

The rules for selecting an overseas fund are similar to choosing a domestic fund, stock, or individual bond. Look for a fund or an individual company that is well managed and financially sound, with a previous long-term track record of at least five to 10 years.

If it’s a mutual fund, ask about your adviser's experience with that fund, request literature on the fund to gauge past performance, and discuss the goals and objectives of the fund. For example, is it purely a growth fund or an income fund? Are the managers of the fund locked in to investing in one country or area, or do they have the flexibility to move assets should the economic or political environment change?

If you're ready to take your money global but unsure of how much to put into international investment vehicles, here's a rule of thumb: Limit the overseas portion of your investments to 10 percent to 20 percent of your portfolio. Also, be sure to have a minimum of two years to allow the assets to work for you.

The Boom Abroad

It’s not only the U.S. market that turned profits for investors over the last 10 years.

According to Morgan Stanley's Capital International Indices, international markets have offered impressive performances as well.

Here are some of the increases that investors have seen in different parts of the world during the last 10 years.

Argentina +1,988 percent
Mexico 1,687 percent
Chile 1,316 percent
Brazil 1,142 percent
Netherlands 493 percent
Hong Kong 470 percent
Sweden 459 percent
Switzerland 456 percent

Note: The above figures reflect total performance from January 1988 through Nov. 30, 1997.

Alison Scavone is first vice president-investments for Smith Barney Inc., Westport Conn.

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