An investor can benefit by diversifying into international stocks. Although the United States has the world's largest stock market, more than half of the world's equities, as measured by market capitalization, lie outside the U.S. Double the size of your potential investment opportunities and you open the door to more good investments. There are no guarantees, but over the long term the average performance of international stock markets has stood up well to the U.S. stock market. The Morgan Stanley Capital International (MSCI) EAFE Index, a widely recognized international benchmark, outperformed the S&P 500 Index in 16 of the 20 rolling 10-year periods that ended 1979 to 1998.
Of course, along with the upside potential, international investing brings with it additional risks. Some countries have a high risk of political or social instability, which could affect the value of investments in those markets. Many countries lack the high accounting and financial reporting standards we expect in the U.S.
This may render information about a fund's investments incomplete or inaccurate. It also makes it hard to compare investments that are subject to different reporting standards. When you invest in a foreign market and your investment is denominated in a foreign currency, fluctuations in the value of that currency against the U.S. dollar could add to the volatility of your investment. For example, when the U.S. dollar strengthens against the foreign currency, the foreign investment decreases in value. As a result, even if your investment performs well, currency risk could cause it to lose value.
It's easy to invest internationally; three methods are investing in mutual funds, ADRs, and Global companies. Mutual funds provide immediate diversification. In addition, mutual fund investors benefit from their portfolio manager's expertise and from the ease of buying and selling shares. Investors are also freed from the...