Open up any investing book and it will talk about the idea of diversification. This is the idea that you shouldn’t have all of your eggs in one basket as the old saying goes. When it comes to investing, some of these eggs are to be invested internationally, or so the experts tell us. Up until recently, no one really questioned this advice. But now more and more investment professionals are.
Do you really need to invest internationally? You may be surprised to learn the answer below.
The Case For Investing Internationally
I’ve already mentioned that you diversify your investments so that you can limit your risk while still holding on to a decent return. But how do international investments play into this idea? In years past, the thinking was that when the US economy is suffering, and as a result the US stock market, you look overseas.
Other nations will still be growing even though the US is struggling. With this growth means their stock markets will be rising as well. So if you split up your portfolio to hold some US stocks and some international stocks, you can still be earning a nice return on your international holdings while the US economy turns around.
In addition to this, there was the issue of growth. As an economy, the US is mature. We’ve advanced technologically faster than most other countries in the world. As a result, while our economy is still growing, it is growing at a slower rate than other countries that are still growing technologically.
As a result of this faster growth overseas, the thinking has been that you can earn a higher return by investing internationally. Of course, you still want to invest in the US too; remember, risk and return are related. But this faster growth can help you to earn higher returns.
The Case Against International Investing
So if we have these great reasons to invest internationally, why should you maybe think twice? A lot has changed recently. For starters, we are no longer in an isolated world. In years past, a recession in the US didn’t mean the rest of the world would enter into recession as well. But now we live in a global world. When the US economy sinks, so do many other countries. Just look back to 2008 as an example.
Just about every country worth investing in took a hit. Your international investments weren’t saving you from not losing money.
In addition to this, the US has a solid government and legal structure. What does this mean? On any day, you can wake up knowing that the US government is in power and that businesses can operate within the law of the land.
In some emerging countries, the government is not so strong. They are prone to coups. As such, the laws that businesses abide by can change overnight. This can lead to chaos and chaos is never a good thing when it comes to investing.
Should You Invest Internationally
After weighing the risks of international investing, there is still reason to invest in other countries. Of course, you will want to review your own situation to make sure doing so makes sense for you. If you decide you should invest internationally, then make sure you limit your exposure.
Don’t put 80% of your money into international investments. Instead put just 10-20%. This will allow you to reap the rewards while still limiting your losses should something happen. At the end of the day, the old saying is true: don’t put all your eggs in one basket. But at the same time, make sure you know where the baskets are and what the potential risks are to those baskets.