Among the options that investors have is investing internationally. This involves selecting global investment instruments to create a geographically diversified portfolio. The main reason or drive for global investment is to increase portfolio diversification and spread the risk of investment among foreign companies and markets. This includes variations in terms of bonds, stick, and mutual funds. One can also invest in futures and options on underlying global investments and currencies.
Essentially, markets are inherently cyclical and the risk appetite of the investors reflects this nature. Global investments provide the opportunity to diversify and take advantage of these cycles. With reduced risk, you also lessen the impact of the investment on performance. It gives the investor aversion to relatively poor performance markets. The investors expand their eligibility for instruments beyond the domestically available investments. They can look into the same investment options in other parts of the world to earn more returns.
Global investments provide investors with a broader selection of investments to include in their portfolio. They can easily broaden their diversification by easily adding new sources of return to protect the overall portfolio when certain investments are not performing. Investing globally can also help in mitigating some systematic risks associated with the economies of specific countries and regions.
While global investment offers a great opportunity for portfolio diversification, it is also associated with the risk of investing internationally. With the diverse nature of investments across the border, the investor encounters special risks. They include fluctuations in currency exchange risks, changes in foreign interest rates, changes in market value, lower liquidity, significant economic, political, and social events, varying market procedures and operations, and less access to important information. To overcomes these risks, savvy investors hedge themselves using various instruments like swaps and currency derivates.
To sum it all up, global investments involve holding securities issued by overseas companies. These are companies in countries than your own. The main benefit of this type of investment is diversification of the risks to reduce portfolio risk and enhance returns. However, it exposes the investor to unique international risks like geopolitical risks and foreign interest rates.