International Diversification

Many investors tend to hold mostly investments from their own country, a pattern called home bias. International diversification reduces dependence on a single economy, currency, political system or stock market.

Different countries' markets do not always move together. An economic slowdown, policy change or industry decline in one country may not affect others in the same way. Holding investments across many countries can therefore smooth out returns.

For example, an investor whose home market is dominated by banks and energy companies might diversify internationally to gain exposure to technology, healthcare and consumer companies that are more common in other markets.

International diversification also provides access to growth in other economies and to companies that may not be available at home.

It brings additional considerations. Currency movements can add to or reduce returns. Some markets carry political, legal or liquidity risks. And in severe global crises, markets around the world often fall together, reducing the benefit of diversification just when it is most needed. Many investors use global or international index funds as a simple way to diversify across countries.