Foreign Fund Investing

By: National Foundation for Financial Education | Source: National Endowment for Financial Education | October 2, 2006

Investing a portion of your money outside the United States can help your portfolio grow, but foreign investing has special risks you need to know before you commit your money. Here's information to help you better understand the ins and outs.

Consider investing overseas
U.S. securities account for only about half the world's investment options. Foreign investing gives you additional options to diversify your holdings by adding geographic and performance diversity to your U.S. investments. If U.S. markets are flat or down, your return may be bolstered by a rise in foreign markets, and vice versa. However, some foreign securities, such as those issued by major companies with worldwide operations, can perform similarly to U.S. company securities.

Determine how much to commit
How much of your total portfolio do you want to invest in foreign securities? There's no right or wrong percentage. Professional financial planning models generally recommend between 10 and 25 percent, depending on your personal situation and risk tolerance. Before buying foreign mutual funds, find out if you have foreign market exposure in funds you already own. Look for your fund's holdings in shareholder reports or on the fund company's Web site. Many large U.S. companies have major operations overseas, for example, and some U.S. mutual funds invest as much as 20 percent of assets internationally.

Understand the risks
Foreign fund investing has unique risks. These include:

• A nation's political and social climate.
• Suspect or unreliable information.
• Different accounting practices that make evaluating companies difficult.
• Foreign currency fluctuations.

Learn the lingo
If you want to diversify your investments with non-U.S. securities only, look for a "foreign" or "international" fund. "Global" or "world-stock" funds invest in both U.S. and non-U.S. securities. If diversification is a goal, make sure any global fund you choose holds U.S. securities different from those you already own. Be aware that funds that focus only on one country or on emerging (developing) markets are very risky and are not appropriate for the investors who seek secure investments.

You should be able to rely on foreign fund managers for market knowledge in executing trades efficiently in those markets. But if the risks make you nervous, and you still want to add foreign investments to your portfolio, consider investing in funds that buy securities only in major developed markets of the world, such as Japan or Europe.

Watch the fees
When investing in any mutual fund, keep in mind that fees eat into your earnings, so keep them low. Be sure to read the fund prospectus so you understand all fees (sales charge, account fees, management fees and other expenses) before you invest.

Before investing in foreign funds do your homework. Investigate the objective, fees and potential risks and rewards of each fund you are considering. Make sure the fund is a good fit for your overall investment goals. Then invest—either in small amounts on a regular basis (dollar cost averaging) or in a single, lump sum. Either way, invest only up to the amount you want to commit to foreign funds.

Take Action

The Foundation for Investor Education, an affiliate of the Securities Industry Association, has extensive general and international investment information.

The NASDAQ Smart Money University's Investing 101 course provides an overview of foreign stock mutual funds and foreign stocks.

Order free educational publications on international investing from mutual fund companies at the Mutual Fund Education Alliance's Investor Library.

This column is meant to provide general financial information; it is not meant to substitute for, or to supersede, professional or legal advice.

Note: The content areas in this material are believed to be current as of this printing, but over time, legislative and regulatory changes, as well as new developments, may date this material.

©2006 National Endowment for Financial Education. All rights reserved.