International Equity Investing is a form of investing that pushes the efficient frontier of a portfolio out further compared to the efficient frontier of a domestic portfolio.

The main benefit of investing internationally is greater portfolio diversification. While this benefit is clear and significant over the long term, it is sometimes not apparent over shorter investment horizons. (Tokat) Some beneficial factors are that the market correlations aren’t fully correlated between domestic and foreign so one can help diminish systematic risk slightly. The international diversification will significantly help reduce non systematic risk if the international portfolio consists of equity unrelated to any in the domestic portfolio.

Recently, high returns from international stocks magnified by the depreciation of the US dollar, have restored some enthusiasm for international investing among US investors. (Tokat) With this said, international investing can potentially yield better returns opposed to the domestic counterparts in that the emerging markets are still witnessing growth phases while the US domestic portfolios have markets that have already grown and potentially can be susceptible to decline as time goes by. Therefore a logical step would be to invest internationally where growth is rampant and maintain capital domestically to preserve portfolio value.

With these benefits some risk factors are also tied in. There comes no reward without risk so some factors to take into consideration are: translation/transaction risk and some specific non systematic risk as well. The translation/transaction risk factor consists of the currency fluctuations that can affect the overall return of the portfolio whether the dollar appreciates or depreciates will significantly impact portfolio return. Also the non systematic risk pertaining to the company in the emerging market can play a factor because one can not fully know the financial strength of the firm and can potentially have a higher risk of bankruptcy or default versus a company held domestically in the US.

In conclusion an investor needs to do some due diligence prior to investing internationally; one has to consider the potential risks in foreign investing in order to establish positions in potentially harnessing the benefits of international portfolio diversification and efficiency.

References:

Tokat, Yesim. "International Equity Investing: Long-Term Expectations and Short Term Departures." Investment Counseling & Reserarch/Analysis (2004): 1-16. Web. 2 Dec 2009.<https://global.vanguard.com/international/common/pdf/international_developed _052004EN.pdf>.