| Topic - Foreign Stocks | Education Center |
AT A TIME when the world economy has become increasingly interconnected, investors can hardly afford to ignore foreign stocks. There's too much opportunity out there and too many ways to tap it. And since the economies of the world's different regions tend to boom and bust in cycles that often offset each other, international stocks can provide excellent diversification for a portfolio heavy on U.S. equities.
Like stocks on the American exchanges, foreign equities vary in size and do not move as a single group. So you can't really say how a "Japanese stock" behaves, or how an "Italian stock" will perform. It's also true that foreign companies are subject to different rules of accounting and far less government scrutiny than U.S. investors are used to. It all adds up to this: Investing abroad is more complicated than buying stocks in the U.S.
That's why most U.S. investors get international exposure by investing in either large, well-established overseas companies like Finland's Nokia or Royal Dutch Shell, or by putting their money in professionally managed mutual funds that have the expertise and resources to assemble winning portfolios from a lot of different foreign stocks.
Buying an international mutual fund is no different from buying a domestic one. As for individual stocks, you can either buy the stocks through a broker directly on foreign markets, or you can purchase what are known as American depository receipts (ADRs) on U.S. exchanges. These shares are surrogates for foreign shares, but have dollar values and move according to the performance of their foreign issuers.
Risk/Reward
Can you say, "Asia"? If you haven't paid attention to the meltdown among the Asian economies in 1998, that
question may not make sense to you. But suffice it to say, economic turmoil in a region that was once the world's
darling taught a lot of investors about the treachery of betting your money abroad. Japan's Nikkei index lost almost
40% between June 1997 and October 1998, as trading partners throughout the Pacific Rim imploded due to
financial mismanagement and corruption. The ripple effects were felt worldwide, as companies with exposure to
those markets lost revenues.
At the same time, however, European markets blossomed as the Continent came closer to true economic union and a rash of U.S.-style corporate restructurings began to pay dividends. One region collapsed; another made up for it. That's why it makes sense to diversify your foreign investments, or let a professional money manager do it for you.