Imagine what it would have been like to be an investor in the 15th century. There were undoubtedly plenty of land-bound merchants who stayed close to home and made a perfectly good living. Those who were rich and fortunate enough to be able to afford an interest in a ship could magnify their potential profits, with accordingly higher risk. Even shippers, however, had incentives to try to minimize the uncertainties of medieval travel by sticking to well-established shipping routes. In this context, Christopher Columbus was an entrepreneur willing to take the biggest risk to get a chance at the biggest potential payoff available in that period.
Today, it's easy to get bewildered by the wide range of investments out there. With thousands of stocks to choose from on the New York and American stock exchanges and the Nasdaq national market, you could easily go through your entire investing life without looking at every single listed company. As if that weren't enough, the universe of mutual funds adds several thousand additional choices. You can find plenty of investment choices to evaluate without leaving America's shores.
If you are content with investing all of your money domestically, you can find lots of good American companies that offer plenty of opportunities for strong performance. You can even invest in American companies that have a global reach. Companies like Nike
If, however, your personality includes a bit of exploratory spirit, you can travel around the world from the comfort of your home computer by doing research on international companies. After all, in this increasingly global economy, can you really afford to limit yourself to local investments?
The world's a big place
Many financial planners advise clients to keep the vast majority of their assets in domestic securities. Yet while the United States still has a strong presence in the world economy, you can't ignore the contributions of the rest of the world. Although the United States has the largest gross domestic product of any country in the world, it nevertheless composes less than a third of the total gross world product of all of the world's nations combined. In terms of economic growth, while America has continued to grow at a moderate pace, emerging markets like China and India have growth rates that dwarf the United States. Of course, these countries are starting from lower levels, making it easier for them to post impressive year-over-year gains. For investors looking for the most dramatic growth opportunities, however, the head start that a quickly growing national economy provides can give your investment an extra kick.
Another way to measure America's overall share of the world economy is by looking at the total market value of companies traded on public stock markets. This method has a significant difference versus using economic statistics like gross domestic product to make economic comparisons; while GDP pays attention to the country of production, stock prices tend to focus on who reaps the overall benefits of that production. For instance, a company like IBM
Set sail for new shores
There are many different ways to invest in foreign companies. Many large companies, such as Toyota
For those investors who are looking for deeper penetration into foreign markets, there are several other options. Many mutual fund companies offer international stock mutual funds that focus on a variety of different foreign investments. Some mutual funds look for companies across the world that meet certain common investment criteria. Other funds focus on particular countries or regions of the world, allowing investors to target parts of the world that interest them. Most traditional mutual funds use active management to choose the fund's investments.
Another option is to use funds that are traded on U.S. stock exchanges. These come in two broad categories. Exchange-traded funds, such as those offered by iShares, are available in several types, including funds that focus on a single country as well as funds covering a broader segment of the world economy. Closed-end funds are similar, but because of the way these funds operate, they often trade at prices that represent a discount or premium to the intrinsic net asset value of the stocks they hold.
Finally, some brokers give their customers direct access to trade on foreign stock exchanges. This can involve a great deal of complexity, since you need to make sure you understand the particular nuances that trading on a foreign market may involve. However, for those looking to direct their investment in single companies, this may be the best way to do so.
Investors who ventured beyond America's borders over the past few years have done exceptionally well, outperforming the domestic market by far. As we’ve seen this year, however, international stocks can be extremely volatile, as investors must face not only the regular risks involved in investing in any company but also other risks, like political and currency risks, that many Americans take for granted. For some, the consequences of mistakes may seem as bad as sailing off the edge of the world. If you have the courage, though, you can find unique opportunities to profit abroad.
This article was originally published on October 9, 2006 and has been updated.
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Kristin Graham updated this article, originally written by Dan Caplinger, and does not own shares of any of the companies mentioned in this article. Coca-Cola is an Inside Value selection. The Fool's disclosure policy goes around the world for you.