Investing Internationally

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	International Investing Personal Finance Advisor by OnLine June 28, 1999

More investors send money overseas, but what are the risks?

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.

Benefits of Investing Abroad: International investments allow an investor to take advantage of long-term growth opportunities that exist outside the United States. 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. By spreading risks among foreign and U.S. stocks/markets, investors can reduce overall investment risk and/or improve returns. 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.

The following table compares returns on U.S. and foreign investments -- returns are shown for (1) Morgan Stanley Capital International (MSCI) EAFE index -- stocks from developed markets in Europe, Australia, and the Far East; (2) MSCI EMF index -- stocks from emerging markets; and (3) Standard and Poor’s (S&P) 500 index -- stocks of large U.S. companies.

Annual Returns -- U.S. Dollars
Year	MSCI EAFE	MSCI EMF	S&P 500
1988	28.59%	79.08%	16.61%
1989	10.80%	53.52%	31.69%
1990	-23.20%	-31.45%	-3.10%
1991	12.50%	31.69%	30.47%
1992	-11.85%	4.56%	7.62%
1993	32.94%	68.76%	10.08%
1994	8.06%	-1.07%	1.32%
1995	11.55%	-9.20%	37.58%
1996	6.36%	5.99%	22.96%
1997	2.06%	-13.45%	33.36%
1998	20.33%	-23.21%	28.58%
Average	4.35%	2.17%	17.05%

Understanding the Risks: Higher growth potential and rates of return usually are accompanied by higher risks. International investing involves several specific risks that should be carefully evaluated:

Exchange Rate Fluctuations: Movements in a foreign currency relative to the U.S. dollar will change the value of a foreign investment. 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. This exchange rate risk can be reduced by investing in several international markets and/or using hedging strategies.
Political and Economic Considerations: Governmental and political climates abroad can be unstable. Foreign economies also may be less diverse than the U.S. economy. Political instability and/or lack of diversity leads to greater volatility, and negatively affects investment markets/values.
Market Operations and Liquidity: Foreign markets usually have lower trading volumes and fewer listed companies than the U.S. markets. Some foreign exchanges may be open only a few hours a day. Certain countries restrict the amount and/or type of stocks that foreign investors are allowed to purchase. Clearing and settlement periods on a foreign exchange may differ from those of the U.S. trading markets. Some international markets do not report stock trades as quickly as U.S. exchanges.
Company Information: The type and timing of disclosures (financial and other) required of companies traded on foreign markets differ from the disclosures required of public companies in the United States. Accounting and disclosure principles differ among countries, which complicates the comparison/analysis of company-specific information.

Transaction Costs: The costs of investing affects total returns. Transaction costs (for example, fees, commissions, taxes) associated with investments in international markets can be higher than transaction costs in the United States. Mutual funds that invest abroad generally have higher fees and expenses than funds that invest in stocks of U.S. companies.

Individual Situation: The most appropriate mix for an individual investor will depend on his/her tolerance for risk, investment goals, and specific circumstances. Also, historical performance is no guarantee of future results.

These are some thoughts to consider about international investing. More information is available in an SEC investor education booklet, International Investing -- Get the Facts, which is available on the SEC’s Web site [http://www.sec.gov/oiea1.htm]. Your financial advisor also can provide information and should be consulted before any action is taken.