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.
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- Why Add International Funds to Your Portfolio?
- The Risks of Foreign Investing
- Determine the International Asset Allocation That’s Best for You
- International Stock Investing
- International Bond Investing
By investing overseas, you have the opportunity to invest in dynamic international companies that may be growing faster than their U.S. counterparts.
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.
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This chart shows the difference in return and historical risk between a domestic portfolio and one that includes both international and domestic stocks. |
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.
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.
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This chart can help you determine an appropriate allocation for international funds depending on your goals. |
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