As little as 30 years ago, the bulk of the world’s securities were issued within the United States. This situation has changed drastically since then, and this change has provided an important opportunity for portfolio management.
Following are five reasons for including foreign securities in an investment portfolio:
- Diversification is a crucial part of prudent portfolio management, and the use of foreign securities provides a means of significantly increasing the diversification of an investment portfolio. The addition of foreign securities to an investment portfolio will reduce the level of risk of the portfolio and should increase its average return.
- The rates of return on foreign securities have periodically exceeded those obtainable within the United States. These higher rates of return can be justified by the higher rates of economic growth experienced by those countries. These rates remain attractive even when adjusted for the higher level of risk incurred in foreign investments.
- There is a wide variety of foreign securities now available. The world economy has experienced extensive growth in the past 30 years. Along with this has come growth in foreign financial markets and the availability of foreign securities. At the same time, U.S. securities firms have expanded their operations worldwide, and telecommunication systems have developed to provide for rapid movement of information.
- Ignoring foreign markets reduces an investor’s choice of securities by over 50%. Years ago, an investor could confidently ignore non-U.S. securities knowing that they represented a small portion of the total world securities. Now, however, foreign securities have grown to such a size they are too big to ignore.
- A large number of mutual funds specializing in either foreign stocks or foreign bonds are available. They can be used as an effective low-cost means of adding foreign securities to an investment portfolio. These mutual funds provide a widely diversified group of securities selected and supervised by experts in international investing.
Based on this analysis, we believe that foreign securities should be a part of every investment portfolio.