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The growing global economy has increased your investing opportunities. Companies outside the United States now represent about two-thirds of the world's total market value. And there are almost three times more foreign companies (32,866) than U.S. companies (11,402) in which to invest.1
The variety of foreign investments can help minimize the impact of turbulence in global markets. You could experience economic downtowns in any one country or region and still participate in the growth potential of others.
The climate for international investing has improved during the last decade. Some international governments have established stricter laws to govern stock markets and the financial information that companies are required to disclose to investors. These laws contribute to investor confidence in the stability and longevity of global markets. Plus, better access to information on the financial health of many foreign companies helps mutual fund portfolio managers make more informed investment decisions.
These factors may make international mutual funds an attractive complement to your U.S. investments. But, keep in mind that international mutual funds shouldn't represent the primary concentration of your portfolio and diviersification alone cannot ensure against loss.
Consider your comfort with risk when selecting your mix of international investments. Core funds invest primarily in developed markets throughout the world, while targeted funds invest in emerging markets or specific countries or regions. The narrower focus of targeted funds makes them more volatile than core funds. But the risk may also depend on a fund's investment style (growth, value or bonds) or the types of companies in which a fund is invested. International bond funds offer another investment type. These funds primarily invest in government or corporate debt securities outside the United States.
When you analyze international investments, you should remember their special risks and that investing in emerging markets may accentuate these risks:
Market risk - In general, overseas markets are more volatile than U.S. markets. And emerging markets are the most volatile of international markets because of their vulnerability to extreme political and economic shifts and unstable currencies.
Political risk - Elections, political takeovers and other government developments can affect the economies and stock markets of foreign countries.
Currency risk - Currency fluctuations affect your overall investment return. A stronger dollar decreases the value of your investment, while a stronger foreign currency enhances it.
Because of increased opportunities, portfolio managers of international mutual funds can cast a wider net when searching for stocks and bonds with the potential for strong investment returns. In addition, international investing may help you further diversify your portfolio.
1Source: FactSet. Data as of December 31, 2009. There may be duplicate companies included in the international portion due to stocks trading on multiple exchanges.
International investing involves special risks, such as political instability and currency fluctuations.
Past performance is not a guarantee of future results. Investment return and principal value will fluctuate, and it is possible to lose money by investing.