Are Foreign Stocks Important to a Portfolio?

Within the next few years, the United States might no longer be the leading economy in the world. The economies of other countries, including China, Indonesia, Turkey, Argentina and India, are growing faster. Between 2000 and 2010, annual growth in U.S. gross domestic product ranged from a low of negative 2.2 percent in 2009 to a high of 6.5 percent in 2005. Over the same period, China's GDP ranged from 8.3 percent to 14.2 percent. Because of their growth potential, foreign stocks have become an important part of any well-diversified investment portfolio.

Diversification

Diversification is a way to try to maximize the return of your portfolio by minimizing risk. One approach is to divide your investment among different asset classes, such as stocks and bonds. Another is to invest in different sectors and in different countries. For instance, you might invest in utility companies and health care as two very different sectors. Your investments in both sectors could include foreign and domestic stocks and bonds.

Adding Foreign Stocks to a Portfolio

There are several ways to add foreign stocks to a portfolio. Stocks of individual foreign companies can be purchased through a broker over a stock exchange. Stocks of companies that do business internationally, such as Coca-Cola and McDonald's, can also be bought through a broker. An investment in foreign stocks also can be made by purchasing shares in a mutual fund.

Global Funds

A mutual fund defined as a global fund invests in companies anywhere worldwide, including companies based in the United States. These funds typically are less risky than international funds.

International Funds

A mutual fund defined as an international fund invests in companies based outside the United States. The fund can focus its investments on a sector, such as health, or on a country, such as China. Generally, an international fund that targets a sector carries more risk than one that has broader diversification.