Financial News & TipsAlan S. Moore / L’Observateur / March 29, 2000Just as traveling to a new country can add excitement and adventure to your life, investing in foreign securities can add diversification and potentially higher returns to your portfolio. As with any journey, you should do yourresearch and learn the language before you embark. The more prepared youare, the better your experience will be.
Published 12:00 am Wednesday, March 29, 2000
A Worthwhile Adventure Diversification is the strategy of putting your money in a variety of investments to spread your risk. Investing in foreign securities lets you takeadvantage of different economic cycles worldwide, making your return less dependent on the U.S. economy.Foreign investments also provide access to fast-growing economies that are in early stages of development. Rapid economic growth often means there isthe potential for high returns on investments.
Prepare for Excitement While international securities offer the possibility of greater returns, they also carry more potential risk for the investor.
Political Risk. Many foreign markets are vulnerable to political instabilityand government sanctions that can have a negative effect on its investments markets.
Currency Risk. Currency exchange-rate fluctuations can boost or limitinvestment returns. A rise in security prices can be offset by a decline inthe value of the currency.
Market Risk. Many overseas markets are also characterized by wide andfrequent price swings that are common in emerging economies.
Experienced Guidance One way to mitigate some of the risks of investing in foreign securities is through an investment portfolio, overseen by a professional investment manager. There are several types of investment portfolios to consider,depending on your risk tolerance and time frame. In addition, yourinvestment manager should have expertise in analyzing information about foreign economies and companies International Bond Portfolios generally invest in bonds issued by companies and/or governments throughout the world, excluding the U.S. Their primarygoal is to provide steady, current income; capital appreciation is secondary.
These portfolios tend to be less volatile than international stock portfolios.
As their name suggests, International Stock Portfolios can invest in a broadly diversified portfolio of foreign stocks with little or no investment in U.S. shares. Part of the risk depends on which overseas markets areavailable to your investment manager.
Global Stock Portfolios are the most diversified of the overseas equity portfolios. Generally, they can invest in a variety of regions around theworld, but also reserve some assets for U.S. stocks, which can help reducemarket volatility.
Diversified Emerging Market Portfolios generally invest in a mix of stock markets in developing regions, such as Latin America and the Far East. Whilethese portfolios can provide significant long-term rewards, there are also risks of sudden and substantial fluctuations, as well as large losses, in the value of these securities.
Single-region Portfolios specialize in a particular region of the world, such as Europe or the Pacific Rim. The portfolio’s value can be adversely affected bychanges in the economies of the region.
Single-country Portfolios invest in companies that trade in a particular overseas market – ranging from developed markets, such as Germany or England, to emerging markets, such as Chile or Russia. If the country sufferseconomic, financial, or political problems, your investment is at risk.
If your long-term investment goals include saving for retirement and your risk tolerance is high, you should consider adding foreign investments to your strategy. It may prove an exciting – and profitable – financial adventure.
Alan S. Moore is a Financial Advisor of Legg Mason Wood Walker, Inc., adiversified securities brokerage and financial services firm that is a member of the New York Stock Exchange, Inc. and SIPC.
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