Global investing helps you diversify by including stocks and bonds throughout the world in your portfolio. Since global financial markets aren’t perfectly correlated—meaning they don’t move exactly in line with each other—investing in both U.S. and non-U.S. securities can help to decrease the volatility of your portfolio. If some parts of a global portfolio are performing poorly, other parts may be performing well. Global investing can help strike the right balance between your risk tolerance and investing goals.
Building a global portfolio
There are a few different types of foreign mutual funds that can provide your portfolio with exposure to non-U.S. stocks and/or bonds. Global and international funds provide the broadest exposure to non-U.S. securities, while regional and country funds have a narrower focus.
These are funds that invest across countries, including the U.S. Some global funds tend to focus heavily on U.S. stocks, while other global funds emphasize stocks outside of the U.S. A global portfolio manager has a very wide universe of securities to choose from when building a portfolio. He or she can compare stocks or bonds across the world and invest in those securities that may have the best chance of performing well.
These are funds that invest primarily outside of the U.S. and they tend to invest across many countries. These funds can be an option for investors that are happy with their U.S. mutual funds but want to increase their portfolios’ non-U.S. exposure.
These are funds that tend to focus on a particular region of the world such as Europe or Asia. While these funds tend to hold many different stocks or bonds, their focus on a particular region gives them a higher risk profile than a fund that invests in many regions. For example, if a regional stock fund only invests in Europe, the fund’s returns may suffer when European markets perform poorly. On the other hand, the fund could experience better returns if European markets thrive. Having a portfolio with diversified international exposure can help protect it from losses that may come from one specific region of the world.
These funds have an even narrower focus than regional funds as they invest in the stocks or bonds of only one country. The returns of these funds are closely tied to the financial markets of one particular country. If the stock or bond market of that particular country performs poorly, then the fund will also perform poorly. With country funds, there is no diversification across countries to help mitigate risk. If used at all, country funds should be used sparingly. It is better to use a good global or international fund in order to build a well-diversified global portfolio.
With a global portfolio, it is important to look for foreign funds that have been able to perform well over the long term, that are run by experienced portfolio managers, and that charge low fees. Note, however, that past performance is no guarantee of future performance. You should also assess the non-U.S. exposure that you already have via your U.S. stock funds. Many large U.S. companies sell their products and services outside of the U.S. In fact, some U.S. companies sell more of their products overseas than in the U.S. If your portfolio is invested in these global companies, then you already have some exposure to countries outside of the U.S. Assessing your non-U.S. exposure and selecting foreign funds for your portfolio can be difficult on your own; an investment advisor can help assess your current investments and recommend the right foreign funds for your portfolio.
Currencies and global investing
Currency movements can influence the returns of a global or international mutual fund. For example, a stock denominated in euros might have returned three percent over the past month. If, however, the euro decreases significantly in value relative to the U.S. dollar over that same period of time, the return of that fund is diminished when converted to relatively more expensive U.S. dollars. This can complicate global investing and add risk to your portfolio. An investment advisor can also help you build a portfolio that accounts for the risk of currency movements.
What to do next
- Consider if global investing can help mitigate the risk within your portfolio and help you meet your investment goals.
- Contact an investment advisor with questions about the role global investment can play in your portfolio.