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Business Matters The opportunities and risks of global investing

February 16, 2011

By Staff Reporter

By Kevin FitzGerald

It seems that some areas of the world economy are improving. I was wondering what your thoughts were on global investing?

— J.H., Huntington, N.Y.

Despite the uncertainties that may persist ahead for markets such as Japan, Asia, eastern Europe and Latin America, there are still investment opportunities abroad for investors seeking to expand their investment horizons. In particular, the January 1999 debut of Europe’s single currency, the euro, moved Europe a long way toward being a single "superstate" comparable to the United States. As Europe’s markets converge, it is logical that companies will also seek physical convergence, critical mass and greater efficiency, thus creating possible mergers and potential new opportunities for investors.

Adding international stocks to an already well-rounded portfolio of stocks, bonds and cash reserves may provide several benefits:

€ Greater Range of Opportunities. Investing outside the U.S. enables investors to participate in many more promising business opportunities. In 1970, foreign markets accounted for only 34 percent of the world’s investment opportunities. But by year-end 1998, more than half the world’s equities (measured by market capitalization) originated and traded outside the U.S.

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€ Globalization. The industrialization of many emerging economies and the breakdown in trade barriers has allowed companies around the world to expand their markets outside their home country. In addition, advances in technology and communications systems are spurring the development of a "global marketplace" and the formation of new equity markets.

€ Enhanced Diversification. Historically, foreign economies and stock markets have tended to move in different cycles from those in the U.S. For example, when the U.S. economy slows down or is in recession, foreign economies may continue to grow.

Weighing the risks

While international investing can help investors pursue growth opportunities in overseas markets, it also carries added risks that deserve close consideration.

€ Currency Risk. Returns that U.S. investors earn abroad can be enhanced or reduced by shifting currency exchange rates because gains or losses in foreign currencies must be converted into dollars.

€ Political, Social and Economic Instability. Political events such as civil wars, policy changes such as nationalization or privatization of industries), and natural disasters (earthquakes, hurricanes) pose a considerable risk to the stability of returns from foreign markets.

€ Liquidity Risk. In any market there is a potential risk that a security may be difficult to buy or sell. This risk is greatest in some foreign markets (particularly emerging markets), where trading volume is lower than in U.S. markets.

Ways to manage risk

€ Adopt a Long-term Approach. Because foreign markets can experience dramatic swings, it’s important for you to maintain a long-term perspective when investing abroad. Time has the effect of smoothing out the short-term ups and downs that are typical of all stocks.

€ Diversify Your Portfolio. Historically, foreign markets have not moved in lockstep with U.S. markets or with one another. Over the long term, a diversified approach may help protect the value of your investments from instability in any one market.

€ Limit Emerging Markets Exposure. If just beginning to invest internationally, it may be best to choose a conservative approach. This would favor markets in developed countries and emphasize larger, well-capitalized companies.

€ Consider Professional Management. In pursuing overseas opportunities, consider participating through a mutual fund or professionally managed account. Both strategies can offer the advantage of access to well-informed, professional investment advisory firms with international investment expertise.

World’s Top-Performing Developed Stock Markets

Year 1st 2nd 3rd

1998 Finland Belgium Italy

1997 Mexico Portugal Switzerland

1996 Venezuela Spain Taiwan

1995 Switzerland U.S. Sweden

1994 Finland Norway Japan

1993 Hong Kong Finland New Zealand

1992 Hong Kong Switzerland U.S.

1991 Mexico Hong Kong Australia

1990 U.K. Hong Kong Austria

1989 Austria Germany Norway

1988 Belgium Denmark Sweden

The information contained herein has been obtained from sources believed to be reliable, but we cannot guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

International investing presents certain risks not associated with investing solely in the U.S., such as currency fluctuation, political and economic change, social unrest, changes in government regulations, differences in accounting and the lesser degree of accurate public information available.

Kevin FitzGerald is first vice president-investments at PaineWebber. He focuses on the areas of professional money management, asset allocation and retirement planning. He can be reached at 1 (800) 654-6162, ext. 448.

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