With all of the variable fluctuations plaguing the American financial markets, investing overseas gives your portfolio an extra cushion of risk management. However, considering that every country has its own variables – politically and economically – it is important to achieve a diversified balance in your global portfolio.
The international risk-to-reward ratio
Investing in emerging markets is fraught with fluctuations and instability. Reviewing the performance of Chinese stocks in the past several years is case in point. Periods of wild swings and financial frustrations are standard as the market adjusts its valuations appropriately. The gem within these risks is the potential for tremendous reward – much greater than those in established financial markets. Therefore, keeping the risk-to-reward ratio in mind, it is important to capitalize upon diversification to maintain both your portfolio’s existing value and growth potential.
Evaluating your international portfolio
The fundamentals of diversification hold true, regardless if you invest domestically or internationally. However, the dynamics of global financing call for specialized portfolio management strategies.
- Proper mixture of countries: The golden rule is that available funds should not be invested in one place. A proper blend of countries provides your portfolio with regional diversification – helping to maintain its value should one country be plagued with financial mishap. Not more than 10% of your global portfolio should be invested in one country. Keeping four to eight high-growth countries in your portfolio may be an ideal number for global investment, depending upon the amount of resources you have available.
- Consistent monitoring of country conditions: Evolution and change are the two constant characteristics of emerging markets, such as China. Certainly China has covered extensive ground since its economic reform in the 1970s, but more changes – especially in the financial sector – are ahead. Consistently monitoring the country’s overall factors, such as politics, policy changes, and consumer sentiment, are just as critical as watching the Chinese stocks in your portfolio.
- Risk management: Any global investment requires proper risk analysis. Every global investor needs to specify the level of risk tolerance – before you purchase any stock. Setting up risk tolerance parameters decreases the risk that your financial decisions will be plagued by the fallacy of trading emotions. You must find ways of risk minimization by undertaking proper strategies of risk management. Some of the most popular methods of this are hedging and diversification.
- Avoiding panic: Every country – developed or emerging – will undergo critical times, whether they are economic or political. The key is to avoid panic, which sets off a stampede of irrational trading. Avoiding panic ties back to setting up your risk parameters before you enter a trade, eliminating the dangerous emotions that can severely injure your portfolio.
- Selling discipline: Before you enter into any international trade, develop specific exit and entry points. Staying long-term in international holdings can be very risky, and many investors opt for short-term to intermediate-term investments. In addition, having pre-determined selling discipline chases away the dangers of greed, both when the market turns against you and in your favor.
Same principles, niche considerations
Indeed, an intelligent investor with strong trading strategies can do well, regardless of an investment’s country borders. Applying the same trading philosophies of your domestic portfolio is important to your global holdings – but you must account for the niche considerations that follow international investment.