Foreign Investments

Foreign Investments

Navigating Foreign Waters: Can you do better overseas? It depends on the economic weather.

Some $500 billion crosses the ocean every year in search of better mutual fund returns. The rewards from overseas mutual funds can be sizable but the risks are also huge. Wild swings from year to year are not unheard of. International fund stocks usually gain more in average compared with domestic stock funds. Sometimes international stock funds fall more than compared with a decline for general equity funds. A look at the graphs comparing general U.S. equity funds and world equity funds show that U.S. and world markets seem to be moving in tandem.

Still want to swim in foreign waters? Your options include investing in domestic funds with big overseas stock holdings, or is one of two types of international mutual funds: conventional open-end mutual funds, and closed-end, single-country or single-region funds. You can also buy shares directly in a foreign company.

A closed-end fund is not as esoteric as it sounds. It’s like an investment company, of which a certain number of shares are sold to the public. Its shares trade on major stock markets like those of any other company. The reason for such funds is simple: They allow countries or regions to open up markets to U.S. investors without the risk of floods of new capital washing in and out and destabilizing their markets.

A coffee shop in Jamaica. Photo: Elena

Most financial advisors agree that individuals who invest overseas should be willing to make a commitment of at least three years, and preferably five. Foreign markets, funds and stocks are generally more volatile than those in the United States. Investors who pull out at the first sign of trouble are most likely to get walloped. Experts generally suggest that you allocate 10 to 30 percent of your portfolio overseas –some counsel as much as half. Despite the risks, a lot of big investors have been looking abroad, and small investors are following in their wake.

One possible solution for small investors edgy about foreign adventures but tempted by potential high returns is to sink some money into the handful of international mutual funds that go practically anywhere on the planet. These funds put most of their money into well-developed foreign markets, which tend to be safer and less volatile, but funnel 20 percent or more into wilder markets.