Financial Focus: Where in the World Are Good Investment Opportunities?
Where in the World Are Good Investment Opportunities?
Back in first grade or so, you learned that U.S. territory ended where Mexico or Canada's began. Geographically speaking, that is still true. But when it comes to investing, you don't have to remain within U.S. borders--because you can find opportunities anywhere in the world.
This fact shouldn't surprise you. After all, we all buy many products produced outside the U.S.--and the companies making those items are likely listed on a stock exchange somewhere. But there are a lot of foreign companies. How can you know which ones offer the best investment potential? And when you buy shares of international stocks, is there anything special you need to know?
Before investing in global equities, you may want to work with an investment professional--someone with the experience and research capabilities necessary to evaluate investment opportunities in an unfamiliar environment. But, whether you work with someone or not, keep these points in mind:
* Special risks- Every investment--no matter where it originates--carries some type of risk. But if you're evaluating a foreign stock, you have to consider the usual risk factors--strength of management, competitiveness of products, etc.--and then look at some special risks, including considerable changes in market value, lack of liquidity, political instability, currency fluctuations, economic climate, foreign taxes and differences in financial reporting standards. (Talk to an investment professional to learn about other potential risks associated with international investing.) As you'll notice, most of these elements share a high degree of unpredictability, so you can't plan for them in your assessment of a foreign stock's overall risk. But you can at least factor in these uncertainties when making investment decisions.
* Diversification- Some investment principles are universal--and diversification is certainly one of them. By investing in foreign stocks, you can help diversify a portfolio that may be exclusively devoted to U.S. companies. But even within your global stocks, you can diversify--by company, industry and country. This last item is particularly important--if a country is going through some type of turmoil the effects can drag down the entire economy and all industries.
* "Hot" regions- Every so often, a particular region grabs the attention of market watchers. The Pacific Rim, Latin America, Western Europe--all have taken their turns as "hot" regions in which to invest. However, by the time you get around to investing in these areas, they may already have begun to cool off. And, in any case, a "hot" region does not guarantee a sizzling investment. Evaluate special risks and your diversification needs before jumping on the bandwagon of a particular country or region.
(BOLD)Limit Foreign Holdings
Ultimately, you'll probably want to limit your foreign holdings to no more than 10% to 15% of your overall portfolio. But don't ignore international stocks. Keep in mind that the U.S. represents only 30% of the world's economy--so you have several continents' worth of possibilities out there.
This article was submitted by local financial representatives of Edward Jones.