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Spreading Your Investment Dollars Worldwide

Needless to say, you could be in for disaster if you do the opposite and keep all of your eggs in just one basket. Most planners would not advocate this approach.

Diversification may even reach outside the country. Not that long ago, domestic securities accounted for almost two-thirds of the value of all the world’s stocks. Today, the U.S. share of the world marketplace is less than one-third. Many financial analysts now consider foreign investments to be an important part of a truly diversified portfolio.

Warning: Despite the emphasis on expanding your portfolio, be aware of the unique risks associated with investing overseas, such as economic and political instability.

Another aspect to consider is currency risk resulting from fluctuations in a foreign currency’s value versus the U.S. dollar. For instance, if you invest in foreign securities, your dollars must be converted into foreign currency to pay for the transaction. Upon the sale of the investment, the foreign currency is exchanged back into dollars. Fluctuations in the exchange rate between the time of your purchase and sale can affect your bottom line.

Nevertheless, you may, with the proper dose of caution, want to dip your toes into foreign markets or enhance your current position. Here are a few ways to add a foreign flavor to your holdings.

Foreign exchanges: Most of the world’s markets allow foreigners to invest directly, and you can place orders through international banks and brokerage firms. Risks include possible marketability problems and currency fluctuations. Furthermore, transactions and receipt of stock dividends and interest payments may be slow.

American Depository Receipts (ADRs): ADRs are certificates of ownership of foreign company shares held on deposit at a foreign branch of a U.S. bank. They are listed on U.S. stock exchanges. That makes trading much easier, although some issues are inactive. Investors still assume currency risk.

U.S. multinationals: Many U.S. companies have extensive global operations. These investments avoid currency risk, but they tend to track the U.S. market more closely than foreign markets.

This is just the tip of the iceberg. You may be able to diversify globally through other types of investment vehicles. Investigate the possibilities before you make any commitments.

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