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International Investing-IP3 - Essay Example

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1) Portfolio diversification is a technique of reducing risks by allocating investments throughout different classes of financial instruments, industries and other relevant categories (Investopedia, 2011). Some investors use random diversification without taking into account investment characteristics such as return on investment or industry classification…
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International Investing-IP3
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Download file to see previous pages One way to diversify is to buy financial securities of the same asset class, but in different industry sectors that are directly affected by a different kind of variables (Yahoo, 2011). For example one can invest in stocks from the energy sector, while simultaneously investing in stocks of the computer technology related stocks. Since economic and market factors affect different industries differently, by investing in a variety of sectors, there is always a good chance of having one or more of your investments outperforming the market average. Diversification also focuses on investing in different classes of assets. For example since bonds historically have a tendency to perform better when stock performance is declining it serves well for a savvy investor to allocate a percentage of their investment portfolio in the bond market depending on the investors level of risk aversion. 2) As many investors already know the market value of a security is determined by a variety of financial, market and socio-political factors. The volatility of the market value of investments is a risk all investors have to accept and plan for. Since the world economies are becoming more interconnected and correlated changes in one market can spread like wildfire to other financial markets. Some argue that for U.S. investors the benefits of investing internationally might be less compared with other countries due to the wide variety of highly diversified multinational corporation stocks available to U.S. investors though local markets as a well developed and diversified economy. There is still a lot of room for the savvy investor to allocate part of its investment portfolio in the international markets especially in emerging markets or underdeveloped economies. Even when due to their degree of correlation, international markets and domestic markets move in the same direction the degree of response to the same situation might be completely different. There are more opportunities for above average returns between emerging economies and industrialized nations since the level of correlation between them is much less. Therefore opportunities abound for extraordinary returns in international markets, albeit at the expense of an increased level of overall investment risks and potential losses. 3) There are many reasons to invest in international markets: Maximum portfolio performance - many investors shy away from investing internationally since they view it as too risky or complex. As a matter of fact although most U.S. investors tend to focus their portfolio domestically, more than 75% of the global economic and over 50% of the total world’s equity market capitalization comes from the international markets (Ishares, 2011). As a matter of fact, international IPO’s now outnumber domestic IPO’s and while international investments are typically more volatile than their U.S. counterparts. They are forecasted to have higher rates of growth than their domestic counterparts. Lower portfolio volatility-By investing in international securities investors can lower portfolio volatility and maximize their return on investment. The use of a single type of investment instrument increases the risk associated with the investment alternative. When investors invest in both the domestic and international markets they are opening the doors of opportunity due to the fact that the investor has the ...Download file to see next pagesRead More
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