International Diversification

International diversification means diversifying stocks and assets in a way that they focus more on foreign markets instead of domestic ones. A well-designed portfolio gives investors exposure to emerging and developed markets.

Although global diversification carries increased risks due to possible economic and political instability in certain markets, it helps investors reduce volatility and averages outcomes. However, this risk can be reduced by avoiding riskier stocks in emerging markets and going for stocks in more mature markets.

This risk can also be offset by investing in the stocks of local companies that are demonstrating good growth in foreign markets.

Diversifying internationally can help investors minimize their losses by averaging the overall outcome of their investments. For instance, if the U.S. stocks do not perform according to one’s expectations, the gains from their global holdings can smooth out returns.

For instance, an investor can split their portfolio evenly between their foreign and domestic holdings. While the domestic holdings may decline by 10%, the global portfolio could increase by 40%, thereby, leaving the investor with an overall net return of 30%.

The risk can be further reduced by investing in a selection of stocks from emerging and developed markets in the global portfolio.

Moreover, international diversification diversifies currency exposure too. This means the investors are also buying the currencies in which the stocks are quoted while purchasing global stocks.

For instance, if you purchase a stock listed on the London Stock Exchange, the value of that stock may fluctuate with the rise and fall in the value of the British pound. If the U.S. dollar falls, your portfolio will help in neutralizing these currency fluctuations.

Thus, international diversification can help you minimize and even out the losses that you might suffer on stocks purchased in one country and help you attain greater profits.