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Tapping into International Markets
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Many investors believe that having a portion of their portfolio invested in international stocks will cushion the blow of falling domestic stock prices. During the 2008 downturn that didn't happen, as foreign stocks were clobbered as hard as domestic stocks. And in some cases, more so.
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Part of the reason for that had to do with the nature and severity of the downturn. That other reason, however, is that as the world economies become more intertwined, their economies–and their stock markets–tend to act more alike (or in investment speak, become more correlated).
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But investing in foreign countries is still a generally accepted way to further diversify your portfolio. In addition, there have been times in the recent past when foreign stocks have outperformed their American counterparts, offering much higher returns.
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Financial advisors generally recommend a range of 15% to 30% allocation to foreign stocks. Anything over that amount may be too aggressive for the average investor.
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However, when allocating to international stocks, be careful when it comes to countries with young stock markets. Investments in these emerging markets, such as Argentina, Brazil, and India, are riskier than those in countries with older, more regulated stock markets, such as the UK or France.
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