Benefits And Costs Of International Portfolio Investments

The concept of international investment is as old as the financial markets themselves. There is significant evidence, going back to the 13th Century, that investors were investing significant proportions of their wealth in foreign assets. For example, the Bardi and the Peruzzi of Florence helped finance the English in the 13th Century; the Dutch invested heavily in British and French securities during the 18th Century. During the later period the Amsterdam capital market was underwriting securities for a number of European countries and the US. Two world wars and a major depression have set back this trend for international investment. However, interest in foreign investment is gradually re-emerging.

 

The benefits of diversification in the context of a domestic equity portfolio are well known. Investors are able to reduce their risk substantially by holding a diversified portfolio rather than a single stock. This is possible because prices of different stocks do not move in exact lockstep and thus investors are able to reduce their risk by spreading their investment in a portfolio of stocks rather than a single security.

There are, however, a number of economic factors that affect all domestic securities, such as interest rates and government policies. Investors can potentially eliminate part of the risk associated with domestic economic factors by investing in foreign markets as well. International diversification works