How to diversify your stock portfolio across international markets

Expanding beyond domestic investments might seem a little daunting, but exploring international markets can lead to significant financial gains

WHEN IT COMES to building your stock portfolio, investing in international markets is an opportunity worth considering.

While there is no guarantee of success, doing this will diversify your overall investment portfolio and can also potentially increase your returns in a lucrative way. 

Although the thought of expanding beyond your domestic investments might seem a little daunting, no doubt exploring international opportunities can lead to significant financial gains.

We’ll explore how you can go about diversifying your portfolio by investing in foreign equities and outline the possible benefits of doing so to your overall financial health.

What is Diversification?

For those who aren’t completely au fait with the term in the context of the stock market, diversification is a tactic whereby people spread their investments across different geographical locations, sectors and asset classes. (Asset classes are defined as fixed income, cash savings, property and equities).

The main reason people do this is to minimise the overall risk of their investments, on the understanding that not all of them will perform equally well at any given time.

Subsequently, as they hold several assets, they have the peace of mind that should one of them experience a downturn, the effects may be offset by how others are performing.

Benefits of Diversifying

There are several benefits associated with diversifying a portfolio. However, the main one is that it can significantly reduce the overall risks that investors might face if they otherwise put all their eggs in one basket. This, in turn, can lead to a more stable level of returns.

Another major benefit is that investment in foreign equities can expose you to companies and industries that you might not otherwise have access to in your home market – particularly concerning innovative technologies and emerging economies.

Research Foreign Markets

Before you decide to invest in foreign equities, it is important to do extensive research. This should involve analysing the political and economic stability of the country you plan to speculate in.

Additionally, you should make a point of trying to understand its historical market performance and financial regulations. At the same time, evaluating specific companies and industries that you wish to invest in, will help you make more educated decisions. You can do this, for example, by checking out information like the WTC share price.

As foreign markets can appear quite complex, you should also seek advice from a financial expert. They can offer you insights about local regulations and highlight appropriate investment vehicles.

Diversification Opportunities

When it comes to diversifying your stock portfolio across international markets, you have a few options available to you. They are as follows:

ETFs (Exchange-Traded Funds)

Exchange-traded funds or EFTs for short are investment funds that get bought and sold on stock exchanges. They offer investors the chance to speculate on different assets including international markets.

Buying international ETFs is a good way to purchase individual stocks without trading specifically in foreign companies.

Global Mutual Funds

Global mutual funds invest in securities, bonds and stocks worldwide. Typically, they are managed by professional fund managers, who have a good knowledge of, and experience in, global markets.

By investing in global mutual funds, you make sure your risk is spread across several different industries and countries.

Foreign Stock Investment

By investing directly in international stocks, you gain ownership of individual shares in foreign companies.

The benefit of this approach is that it provides you with more control in accruing and managing your investments and gives you the potential for significant returns, assuming you make savvy choices on promising companies.

Managing Risk

With every investment comes risk, and for international markets, there are two main types – hedging and staggered.

Hedging is a technique for risk management that recognises the degree to which currency fluctuations can positively or negatively impact the returns of foreign investments.

It uses financial instruments to reduce any potential losses that might be incurred through movements in exchange rates.

As its name suggests, staggered investment does not speculate all your money in one lump sum. Rather, it adopts a ‘dollar-cost averaging’ strategy where you invest the same, small amount regularly to mitigate the risk of over-investing when market prices are at a high level.

Monitoring Your Investments

To ensure your investments are successful, it is important to monitor them regularly.

Also, keep an eye on global news events that might affect their value and make adjustments as necessary.