Going Global

Question of the week:You advocate investing one-third of your portfolio in an international mutual fund. The U.S. economy is the biggest and strongest in the world, so why should I bother to invest in foreign countries? --A Skeptic in Seattle Dear Skeptic, You're right that the United States stock market is the largest in the world, but it still only represents about half of the global stock market. If you're investing for the long term, it makes sense to participate in growth all over the world, not just in your own country. We recently asked members of the Armchair Millionaire community about why they invest internationally. Without a doubt, diversification is the most cited reason: "I currently have 20 percent of my portfolio invested in international mutual funds, which I are a great way to increase diversification and decrease risk." --Chris J. "I am a huge fan of international funds as a large part of a diversified portfolio. I feel that one should never limit growth potential to one specific nation." --Vito Z. Like these folks, I believe that any complete diversification plan includes overseas investment. It works because the U.S. and world markets tend to have a low correlation--that is, when one zigs or zags, the other tends not to follow--it's on its own track. It has often been the case that when the U.S. market is in a slump, international markets are up (and vise versa). If you decide to go abroad with a portion of your investments, my quick guide will get you started. The Armchair Millionaire Guide to Investing Internationally How do I do it? Mutual funds are by far the easiest way to invest internationally. Your options include international funds (which invest in countries outside of the U.S.), global funds (which invest all over the world, including the U.S.), regional funds (which specialize in one region, such as Europe or Latin America), and country funds (which invest in just one country). There are also emerging markets funds, which invest in countries with younger, less well-developed economies. How do I choose the right fund? Look at all the things you normally would when choosing a fund, like the fund management, costs, past performance and overall fit with you portfolio. Pay special attention to fees, which tend to be higher in foreign funds than domestic funds, and the experience of the fund manager in that particular part of the world. What about index funds? Like their counterparts here at home, international index funds offer key advantages over actively managed funds: broad diversification, low costs and generally better performance over time. There are a number of international indexes with funds to match, but my favorite is the Morgan Stanley Capital International EAFE index, which tracks blue-chip stocks of Europe, Australia and the Far East. What are the risks? Foreign investments face a couple of special kinds of risks that you should understand. These include currency risk--the chance that fluctuating exchange rates could impact your investment, and country risk--the possibility that economic or political events in a particular country will affect the value of investments. THE BOTTOM LINE: It's a big world out there, and when you're making decisions as important as where to invest for the long term, don't unnecessarily limit your options. Doing so could mean you miss out on both growth and diversification opportunities.