Investing internationally has great upside. One of the many advantages is that the investor is diversifying their portfolio globally. Many people have been trying to capitalize on this up side, with the number of global investors increasing exponentially in the last two decades. This is due to the upswing in globalization of the world.

The benefits are numerous when it comes to investing internationally and global diversification, yet it usually takes a long term investing approach to realize these benefits. The reason is that the goal of diversification is to realizing the highest gains as possible yet decrease variability as possible. When many investors are trying to decide if they should invest internationally, they look at a number of things: the average and the variability of the U.S. and foreign market, and the correlation of these markets. It is to the investor’s advantage to have investments that have opposite correlations and low variability.

With the great upside, there is also a downside and different types of risk. The investor has more risk factors to think about when investing internationally. First, the foreign country that the investor picks to invest into has a different government and different customs and laws. America has many financial safety nets that many other countries do not. Second, there is a transaction risk. Transaction risk is risk that is put on the investor by changing currency exchange rates. If an investor invests into a foreign country, and the foreign currency weakens, then the investor will have a lower rate of return. But if the foreign currency strengthens, the investor will reap a higher rate of return.

Citation:

https://global.vanguard.com/international/common/pdf/international_developed_052004EN.pdf