One of the main reasons people invest for retirement is to be able to travel to exotic and interesting places. Exposing your portfolio to far-off lands can help make this goal more attainable. The problem is that researching and selecting foreign holdings can be a full-time job, leaving little or no time to enjoy the fruits of portfolio success. Fortunately, there are many Exchange Traded Funds to make the task much less daunting.
The first step is an understanding of various risks associated with each opportunity. For example, emerging markets such as Latin America, China, and India can produce tremendous returns, but can also generate huge losses in a short period of time. Developed markets such as Europe, Japan, and Canada also fluctuate, but generally not as much as emerging markets.
The next decision is whether to invest in broad regions such as Latin America or in specific countries such as Mexico and Brazil. Investing in broad regions provides more diversification and reduces specific country risk while investing in single countries can result in a wider range of profits and losses. Also, it is important to note that individual country Exchange Traded Funds can be heavily weighted in a small number of individual companies. For example, the Mexico I-Share (EWW) has almost 25% invested in one stock, America Movil, while the Latin America I-Share (ILF) has less than 12% invested in America Movil and has holdings in four countries instead of just one. One of the benefits of investing in ETFs is a reduction in company-specific risk, so an ETF with too much in one company defeats that purpose. To understand why this is important, just think of Enron and Worldcom.
The final step is to determine the amount of your portfolio to be invested in international investments. This percentage is different for everyone as it relies on considerations such as investment goals, time horizons, and risk tolerance.
Investing in foreign stocks has special risks, so proper risk management strategies are very important. However, itâ€™s a big wonderful world out there and you owe it to your portfolio and yourself to explore all the world has to offer.