Want to Be a Global Investor? Learn the Basics

Are you thinking of becoming a global investor? You can start by familiarizing yourself with the advantages and disadvantages, as well as some of the basics, of international investing.

Key advantages to being a global investor is that you increase the diversity of your portfolio and position yourself to take advantage of potential growth in foreign economies.

“By including exposure to both domestic and foreign stocks in your portfolio, you’ll reduce the risk that you’ll lose money and your portfolio’s overall investment returns will have a smoother ride,” according to an advisory from the U.S. Securities and Exchange Commission or SEC.  “That’s because international investment returns sometimes move in a different direction that U.S. market returns.”

In the current economic environment, high net worth investors are slightly less likely to invest internationally, according to a fourth quarter study by Millionaire Corner that tracks financial product usage among affluent investors. As the U.S. economic recovery gains traction, growth in Asia slows and Europe battles a debt crisis that threatens to tip the continent into recession, high net worth investors report a lower level of interest in international investing.

Thirty-five percent of investors with $5 million to $25 million plan to invest internationally in 2012 – down from 39 percent in 2009 and 50 percent in 2008.

Despite a moderating interest, half high net worth investors are maintaining exposure to international investments. International mutual funds, alone, are owned by 48 percent of the high net worth.

A global investor can invest internationally through a variety of products that include mutual funds, exchange-traded funds, foreign stocks or direct investment in foreign markets, said the SEC. Mutual funds may be global – that is investing in both foreign and U.S. companies – or international. An international fund targets companies domiciled in countries outside the U.S. Some mutual funds focus on a region, such as Asia, or an individual country, such as Brazil. An international index fund passively tracks a particular market sector.

Although a global investor achieves greater diversification and opportunities to participate in growth in foreign markets, he or she also takes on special risks posed by international investing. These risks include changes in currency exchange rates, extreme market volatility, political and social events in other countries and lower liquidity of investments.

An international mutual fund can reduce some of the special risks facing a global investor by providing an experienced manager who understands how foreign markets operate, can handle currency conversions and pay any foreign taxes. A mutual fund can also help a global investor reduce risk, according to the SEC, which notes “Mutual funds provide more diversification than most investors could achieve on their own.”