One more way of diversification is to invest in financial instruments of international markets. While the financial instruments remain the same, like stocks, bonds and mutual funds, the investor becomes exposed to completely different types of risks and rewards that are not correlated with the domestic market and open a new financial niche.
Stocks of international companies, being a share of company ownership, may be of entirely new industries and markets and give higher returns than the local ones. However, it is necessary to be aware of the international financial state, government policies and support to companies, promising niches and many other nuances.
Bonds represent debt issued not only by international companies but also governments. Due to different country risks of international governments and companies, the return may be high. Nevertheless, it exposes the bond owner also to currency risk or reward depending on currency moves. To hedge against currency risks, referring to additional protection instruments like forwards or options is necessary.
Mutual funds give the share of a pool of international stocks, bonds and other assets professionally selected and managed. For example, mutual funds provide access to a highly diversified portfolio of assets with higher returns than the local ones.
With all the attractiveness of International markets, it is necessary to highlight the risks again. Political, economic and currency risks should be carefully managed. Otherwise, they can affect the portfolio.
In conclusion, international markets can be a good way of diversification and a source of additional return. But any additional return goes tightly with the additional risks. In this case, ISEC Wealth Management usually highlights that international risks are better managed by professionals before implementing ideas into investment decisions.
Risk Warning: The information in this article is presented for general information and shall be treated as a marketing communication only. This analysis is not a recommendation to sell or buy any instrument. Investing in financial instruments involves a high degree of risk and may not be suitable for all investors. Trading in financial instruments can result in both an increase and a decrease in capital. Please refer to our Risk Disclosure available on our web site for further information.