International funds — those that invest entirely outside the U.S. — provide another level of diversification for your portfolio and another way to manage risk.
International funds may reduce the
volatility
of your domestic portfolio because the prices in overseas markets may move in different directions or at different times than the prices on U.S. markets. For instance, when the U.S. stock market is flat, strong economies in other countries may move stock prices on their markets higher. Or during a downturn in the U.S., international markets may fall as well, but perhaps not as far or as fast.
Among the potential problems with international funds is that you take on a certain amount of currency risk, though some funds use
hedging
strategies to moderate its effect. And, if you're investing in countries that face potential political instability, the economic consequences of that turmoil can affect the value of your investment.
Higher risk may bring higher returns
On the flip side, developing countries that may be unstable at certain times also may provide periods of rapid growth. They may offer opportunities to invest in companies producing new products or services. While it can be difficult for individual investors to identify promising companies in such markets, a number of mutual funds specialize in regional or country-specific small-company growth.
World Funds
Like international funds, world funds — also called global funds — can help you diversify abroad. But while international funds invest exclusively in non-U.S. companies, as much as 75% of a world fund portfolio may be invested in U.S. securities.
Marc Lackritz
Marc Lackritz discusses how currency risk can affect returns.
When the total returns in overseas markets are converted from local currency to U.S. dollars, returns become much more variable, reflecting the wide fluctuations in the value of the U.S. dollar versus other currencies. This currency risk means that a weakening U.S. dollar will enhance the returns earned by U.S. investors in international markets and a strong dollar will reduce them.
domestic portfolio because the prices in overseas markets may move in different directions or at different times than the prices on U.S. markets. For instance, when the U.S. stock market is flat, strong economies in other countries may move stock prices on their markets higher. Or during a downturn in the U.S., international markets may fall as well, but perhaps not as far or as fast.
Marc Lackritz