International Diversification – Protecting Your Nest Egg Using International Leverage.
How do you define diversification? Many investors would argue that in order to be considered diversified, you need to hold a minimum of five different stocks or two mutual funds in separate market sectors. Some would also argue that you need even more five stocks or funds to be truly diversified. About.com defines diversification as:
Diversification is the calculated spreading of your investments over a number of different asset classes. This cushions your portfolio if one part is down, since different asset classes (stocks, bonds, cash, etc.) seldom move in the same direction. In mutual funds, you achieve diversification by the fund owning 50 stocks, instead of a few.
I agree with everything here but feel that many investors commonly overlook one very important point when it comes to diversification. A point that could be providing them with a false sense of security and cost them a lot of money.
That point: They overlook the market as a whole. By this I mean they are diversified, but only within US markets. If perchance the North American markets should crash or recess, as they have done as recently the early 90’s, one’s portfolio would seemingly have all their eggs in one basket. I have heard many stories of people getting “wipped out” of the market for this very reason.
One solution that could help prevent this is to consider Investing internationally. It is probably easier than you think. Despite individual investors not having direct access to many international stocks, they do have access to mutual funds, which in tern have direct access to international stocks. Even though these international stocks are not traded through the US markets (Dow, Nas, S&P, ect.), thus making them inaccessible to many private investors, mutual funds, such as the wide variety offered by T. Rowe Price, give us that option.
I am currently invested in both the Latin America and Europe through the T.Rowe Price Emerging Markets fund. The first fund is the Emerging Europe & Mediterranean Fund (TREMX). The second fund is the Latin America Fund (PRLAX).
Both of these funds are in very hot markets overseas and have performed very well for me, needless to say. Should the United States market take a big tumble or recess, these investments could prove invaluable. My point here is that diversification is an essential part of investing and looking for international opportunities gives you that one extra layer of security.