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Diversification. For most investors, it's the most important rule to follow. Just as you can diversify by investing in a variety of funds within the domestic market, you can diversify your portfolio even more by investing in stocks and bonds abroad. Please note that diversification cannot assure a profit or protect against loss in a declining market.

For many years after World War II, the United States dominated the world economy. Today, the international markets have become a much more dynamic and multifaceted place for investors than they were in the past. Many new opportunities have emerged overseas, but finding them requires the resources and experience to conduct a truly global search.

At a Glance

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Why Add International Funds to Your Portfolio?

Today, more than half (54%) of the world's stock investment opportunities, as measured by capitalization, are outside the U.S.

In foreign markets, you will find:

  • 7 of the 10 largest automobile companies
  • 7 of the 10 largest diversified telecommunications companies
  • 8 of the 10 largest metals and mining companies
  • 6 of the 10 largest electronic equipment and instruments companies
  • 5 of the 10 largest household products companies
Source: MSCI Technologies; data as of 12/31/12.

If you focus your portfolio solely within the U.S., you're excluding a major portion of the world's investment opportunities, not to mention some fast-growing and innovative companies.

Enhanced Return Potential

By investing overseas, you have the opportunity to invest in dynamic international companies that may be growing faster than their U.S. counterparts.

International stocks and bonds allow you to invest in some of the best-performing markets in the world.

Despite posting solid long-term gains, the U.S. is rarely the leading individual market in any given year. Even during the bull markets of the late 1990s, the U.S. was out-performed by markets in other countries. Investing in foreign stocks and bonds lets you benefit from bullish markets overseas.

Lower Volatility

While international funds generally are more volatile than similar domestic funds, including them in your portfolio can provide greater diversification, potentially lowering the overall volatility of your portfolio.

A note on international versus global funds: International funds invest exclusively in foreign companies. Global funds invest in both foreign and U.S. companies and generally are less volatile than strictly international funds.

The Risks of Foreign Investing

While international diversification may help to reduce overall portfolio risk over time, there are important differences between U.S. and foreign investing that can affect the day-to-day volatility of international holdings:

  • Political or economic instability in foreign countries could negatively affect foreign investments, especially in emerging markets.
  • Fluctuating foreign exchange rates can increase or decrease the dollar value of an investment even if the security's price remains unchanged.
  • Financial information about specific companies in emerging markets can be difficult to obtain.
Note: Diversification cannot assure a profit or protect against loss in a declining market.
Building Your International Portfolio

The key to developing a long-term strategy is to find one that you will be comfortable following and will not abandon prematurely. Consider your willingness to accept day-to-day fluctuations in the value of your overall portfolio.

Determine the International Asset Allocation That's Best for You

Think of your international portfolio as an extension of your domestic portfolio; it likely contains stocks, bonds, or a combination of both that you adjust over time according to your goals. Similarly, your international allocation should reflect your investment time horizon and your specific investment goals.

The Investing by Time Horizon chart can help you determine an appropriate allocation for international funds depending on your goals.

Once you decide on an overall allocation between U.S. and foreign stocks and bonds, you're ready to select individual funds. You should have at least one broadly diversified international fund focused on established markets as a core holding. You can augment your core holding with more specialized international funds to further diversify your portfolio.

Or Choose a Single-Fund Solution

You can either build your portfolio using the strategies outlined above or choose a single-fund solution like the Spectrum International Fund, which is a widely diversified combination of international stocks and bonds.

The Spectrum International Fund is subject to general stock and bond market risks. In addition, funds that invest overseas generally carry more risk than funds that invest strictly in U.S. assets. These risks include currency riskā€”the effects of negative currency exchange rates.

Copyright 2014, T. Rowe Price Investment Services, Inc., Distributor. All rights reserved.