In recent years, Americans have allocated an increasing percentage of their portfolios to international equity securities. At the end of 1997, foreign stocks accounted for almost 10 percent of all equity securities owned by U.S. investors. Although international markets can be very volatile, significant growth potential exists in some foreign economies, particularly certain emerging markets.
Diversification is another important benefit of international investing.
This benefit results from the fact that U.S. and foreign markets do not move in tandem. Studies of historical data have found that, when invested solely in equity securities, a portfolio of U.S. and foreign stocks can produce greater returns with less risk than portfolios of 100 percent U.S. stocks or 100 percent foreign stocks. When the value of the U.S. dollar weakens relative to the foreign currency, the investment increases in value. Conversely, when the dollar strengthens, the foreign investment decreases in value. Governmental and political climates abroad can be unstable.