An important aspect of personal financial planning involves
channeling savings into investments that can grow and fund
long-term financial goals. Investors can invest in both domestic and foreign-based
companies. Investing internationally offers greater diversification than investing
only domestically. A number of academic studies overwhelmingly support the
argument that well-structured international diversification does indeed reduce the risk of a portfolio and increase the return of portfolios of comparable risk.
One study found that over the 10 years ended in 1994, a diversified portfolio
consisting of 70% domestic and 30% foreign stocks reduced risk by about 5%
and increased return by about 7%.
To capture these higher returns and lower risks, most individual investors
buy international mutual funds. These funds take advantage of international economic
developments by (1) capitalizing on changing foreign market conditions
and (2) positioning their investments to benefit from devaluation of the dollar.
Clearly, individuals should consider including some international investments—
probably international mutual funds—in their investment portfolios.