Anyone who has even a small amount of investment experiance has certianly learned that diversification is a very important goal. The idea being that when assets are diversified, risk is also reduced, because if one portion of the portfolio fails, the others will suceeed. Many people might think they have a balanced portfolio if it includes a 401K, mutual funds, stocks, bonds and perhaps some gold or other commodity.
The problem is that most people, however, have all of thier investments located:
1. In their home country.
2. In one currency.
Lets take a hypothetical example to demonstrate the dangers of an exclusively-domestic investment strategy.
Let’s say you live in the country of Bergistan.
Assume that this country “Bergistan” is floating along just fine, until one stretch where it is repeatedly attacked by terrorists on an almost daily occurance. Schools are shut down for months at a time, panic stricken individuals quit thier jobs and don’t leave thier homes, those who can escape (the rich) flee to safer locales. The economy grinds to a halt.
International investment all but stops, foreigners cease buying thier bonds and demand repayments of debt. Unemployment skyrockets, riots ensue, businesses close, the Begistan stock market crashes. The future of Bergistan is grim indeed. Futhermore, the Bergistinian national currancy, which was once thriving in the global economy, becomes worthless. Anyone living in Bergistan, who thought they had a well diversified portfolio of Bergistan Stocks, Bergistan Bonds and Bergistan currency realizes thier assets are now worthless.
This is an extreme example, but it nonetheless exemplfies the inherent danger of putting all your “eggs in one basket”, or investments in one currency.
Diversification into foreign markets can be risky, but the opportunities can provide you with wealth you never before thought possible.
By utilizing an advised, thought-out, and well constructed international investment strategy, an investor can potentially mitigate the aforementioned risks, as well as use arbitrage, timing, and prior investment knowledge to generate high rates of return.
