Global Vs. International Investment: Terms Test Investor IQ

Even typically savvy Millionaires stumble over the definitions of global vs. international investment, terms that seem interchangeable at face value but have important distinctions for investors seeking to diversify outside U.S. equity markets.

The large majority of affluent investors – 62 percent – mistakenly define international investing as investing in a company that does business in multiple countries and may be headquartered either in the United States or abroad, according to a January survey by Millionaire Corner. That definition more correctly describes global investing, which gives investors exposure to multi-national companies that may or may not be domiciled overseas.

Nearly half the investors – about 49 percent – said they view global and international investment as one and the same thing. While both global and international investing involves companies that do business all over the world, global investing can include U.S.-domiciled companies, while international investing excludes them. The distinction is important because international investing allows investors to diversify away from U.S. companies and achieve exposure to an asset class that may have less correlation to the U.S. market, according to the life insurance company AXA Equitable. Some international funds target a specific region or country, allowing more aggressive investors to bet on growth in more volatile emerging markets.

International investment reduces the risk of an all-U.S. portfolio and provides opportunities to participate in growth in foreign markets, which accounted for 58 percent of the world’s stock market capitalization in 2010, according to George Evans, OppenheimerFunds Director of International Equities. That share is expected to grow to 66 percent by 2030.

 “Keep in mind that foreign investing is subject to certain risks, such as currency fluctuation and social and political changes,” says AXA.

Global investing affords international exposure, but dilutes the risks associated with international investment – currency and political risk – by investing in both U.S. and foreign domiciled countries.

A global fund may overlap with large-cap U.S. funds because, according to Evans of Oppenheimer, most major U.S. corporations operate globally. Evans notes that companies that make up the S&P 500 Index derived a full 46.6 percent of their sales from overseas in 2009, according to the latest available data.

The distinction between global and international investment may appear to be negligible, but the terms can help investors diversify and manage portfolio risk. 

To understand the types of risks your portfolio could encounter, watch our Investment Risk video.