What it means
A home-only portfolio is exposed to one economy, one currency and one set of political risks. Adding foreign shares, bonds or funds means that a downturn in one country may be partly offset by steadier performance somewhere else.
Economies at different stages often follow different cycles. Investors can build an international portfolio in several ways.
They can buy foreign shares directly, use international mutual funds or exchange-traded funds, or buy depositary receipts that represent overseas shares and trade on their home exchange. Funds are usually the simplest route for smaller investors.
Return comes from two sources, the assets themselves and the exchange rate. If a foreign market rises but its currency falls against the investor's home currency, the gain is reduced, and the reverse can also happen.
Costs and complications are higher than at home. There can be foreign withholding taxes on dividends, higher trading costs, differences in accounting standards and, in some markets, limited information or weaker investor protection.
The right share of foreign assets depends on the investor's goals, time horizon and appetite for risk. Many advisers suggest a meaningful but not dominant share, and a portfolio manager may reconsider this proportion from time to time as conditions change.
Regular rebalancing brings the mix back to its target. The nuance is that diversification across countries does not remove risk entirely.
During global crises, markets often fall together, so the protection is weaker exactly when investors want it most.
In practice
Real-world examples.
Example
A retired engineer holds only shares from her home country. Her adviser suggests moving 30% of the portfolio into global equity funds. The change reduces her dependence on a single economy, and she keeps enough in cash to cover three years of withdrawals.
Example
A corporate pension fund decides to invest 25% of its assets overseas. It also decides to hedge half of the currency exposure to limit swings in its reported funding position. The investment committee reviews the policy every year and records the reasons for any change.
Example
A young investor uses a low-cost fund covering many countries as the core of her savings. She adds a small allocation to emerging market shares for extra growth. She accepts that the emerging holdings will be more volatile, and she sets an automatic monthly purchase so she does not try to time the market.
Formula
Calculation
Portfolio return = (Weight of domestic assets x Domestic return) + (Weight of international assets x International return)
Suppose an investor holds $500,000, with 60% in domestic assets and 40% in international assets. The domestic holdings return 6% and the international holdings return 10% in the investor's home currency. Portfolio return = (0.60 x 6%) + (0.40 x 10%) = 3.6% + 4.0% = 7.6%. In dollars, the gain is 500,000 x 0.076 = $38,000. If the international holdings had returned only 2%, the portfolio return would be 3.6% + 0.8% = 4.4%, or $22,000.Case study
Seen in the real world.
This is an illustrative story about a fictional investor, Daniel, who held a portfolio of $300,000 invested entirely in the shares of companies from his own country. When his home market fell sharply over one year, his portfolio dropped by 25%.
After talking with an adviser, Daniel moved 35% of his money into funds that held shares and bonds from several other regions. In the next downturn, his home holdings fell again, but the international holdings fell less, and the overall drop was smaller.
Daniel's currency exposure also added some volatility, which he had not expected. The illustrative story shows that an international portfolio can smooth results over time, although it needs monitoring and a clear understanding of currency effects. Daniel now reviews the split between home and foreign holdings once a year.
Watch out
Common mistakes.
- Believing foreign assets always reduce risk. In global shocks, markets can fall together.
- Ignoring currency effects. Exchange rate moves can add or subtract several percentage points from the return, which sometimes outweighs the asset's own performance.
- Forgetting taxes and costs. Withholding taxes and higher fees can reduce the net return, so the figures should be compared after costs.
Questions
People also ask.
How much of a portfolio should be international?
There is no single answer. It depends on the investor's goals, risk tolerance, time horizon and home market, so professional advice is helpful, and the split should be reviewed as circumstances change.
Should I hedge currency risk?
Hedging reduces swings but costs money, and the right choice depends on the investor's horizon and need for stability. Long-term investors often tolerate currency movements, while those who need cash soon may prefer hedged funds.
What is the easiest way to hold foreign assets?
Many investors use diversified funds or exchange-traded funds, which hold the overseas securities on their behalf.
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