Why Should We Invest Internationally?
[bs_lead]"Half of the opportunity today exists outside of the United States." -Kent Kramer, Foster Group[/bs_lead]
The world we live in today is becoming increasingly globalized. News of trouble in the Chinese stock market, currency speculation, and other global issues often leave investors wondering why should we invest internationally?
No equity market provides a steady positive return year after year. All of them have risks. However over the long-term, disciplined investors can expect to be rewarded for taking on such risks. The international equity market provides a bigger set of investment opportunities for investors. These investment opportunities come from various countries and asset classes each with different sets of risks and expected returns. Often we see these countries exhibit varying ranges of correlation to US equities. When an investor includes asset classes with different correlations into their portfolio (e.g. when the US zigs, International markets zag) they achieve a smoother ride in the markets through the power of diversification.
Looking back on the period from January 2000 to December 2009, we can see a great example of the benefit investing internationally gave investors. During that time, the US S&P 500 index had a total return of -9.10%. International markets, derived from the MSCI World ex-US Index, had a total return over the same period of 17.47%. Had investors ignored the international markets and invested solely in the United States, they would have missed out on a significant investment opportunity internationally, but also taken on more risk than they needed to by not diversifying into international markets.