Investing in foreign markets can be a bit confusing. They seem to be going up and down all the time and big crashes across the globe keep making the news. So why should you get involved?
There are two main reasons foreign funds will benefit both your finances and your sanity. They can:
- Diversify your investment portfolio
- Allow you to take advantage of long-term growth potential
Why diversity is important
Every market, no matter how mature, will go through a series of ups, downs, and corrections on a semi-regular basis. Buying stocks in foreign markets that follow a different up and down pattern than the US adds an extra layer of security to your investment. It’s just smart not to keep all your eggs in one basket.
Foreign markets have more room to grow
The US has a very mature regularly-traded investment market. It moves forward at a relatively slow, steady pace which makes it more difficult to realize big gains on your investments. On the other hand, emerging foreign markets, like the younger economies of Eastern Europe, South America, Africa, Asia, and the Middle East, have enormous long-term growth potential.
The smart way to make foreign investments
Stock prices go up and down—it’s just what they do. Markets will take short-term dips and economies will get in trouble. This turbulence is important to follow if you are a stock broker and your job is to make short-term, risky investments. However, when you are building for the future, it doesn’t make much sense to watch these day-to-day fluctuations.
What’s important are the long-term trends that are not really affected by short-term market volatility. You care about your future—a stock going up and down a couple of cents overnight shouldn’t mean much to you compared to its trend over many years.
ETFs and low-cost mutual funds are a great way to get the long-term benefits of foreign market investment while minimizing the short-term risks.
Both work by grouping stocks and markets together. Instead of buying into a single company that may crash and burn, you buy into a group of companies that sell a variety of products and services; the diversity protects you from short-term losses by absorbing any shock waves.
To start with, it’s smart to get into ETFs or mutual funds with low expense ratios that are diverse enough to cover a nice cross-section of the market. There are a lot of options to chose from, including:
Vanguard Total International Stock ETF (VXUS)
This ETF covers the entire international market outside the US. That’s about as diverse (and safe) as you can get when investing internationally.
iShares MSCI Pacific ex Japan (EPP)
This fund is more specific, covering stocks only in Asia, but excluding Japan. The emerging markets of China and India could provide significant growth over the coming decades.
Vanguard European Stock Index Fund (VEURX)
Morningstar calls this fund “one of the best options for passive exposure to European stocks” an investor can find. Although Europe has experienced volatility this decade, that could mean you have the chance to buy low and watch the markets stabilize and grow in the future.
Any investment is at least a little bit risky. But risk is necessary to have any chance of gains. Foreign markets are riskier than US markets, but they also have a higher chance of growing over time.
Don’t get fooled by the news reports—market fluctuations are natural, and have no bearing on real growth over long periods of time. Putting part of your investments in foreign markets either through ETFs or low-cost mutual funds and playing the long game will maximize your chance of real gains over your lifetime.
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