I have always advocated investing internationally as part of a sound investment strategy, primarily for diversification purposes. These days, with an intertwined global economy, most investors investing solely in the U.S. market are investing internationally, by virtue of U.S. corporations’ global operations, sales and foreign ownership. That said, I still believe it prudent to invest 10 percent to 20 percent of your investments internationally, depending on what else is in your investment portfolio. In order to diversify your risks, I recommend investing across multiple regions (large, industrialized countries and also emerging, developing countries), rather than one area. The best way to do that, for the average investor, is to use international mutual funds or exchange traded funds. Note that generally an international fund invests outside the U.S., whereas global or world funds invest internationally and in the U.S. The U.S. stock market may be one of the biggest, but isn’t the best performer every year. If you are currently invested internationally, and your time horizons or circumstances have not changed, hold fast.

A well-diversified portfolio is an excellent investment strategy in any type of market. Since it is impossible to predict which asset class will perform the best in any given year, diversifying into many different styles is the most prudent approach. Evaluating your financial plan on a regular basis certainly makes sense, but changing strategies simply based on market conditions is rarely a good idea. Keeping in mind that diversification is key, international investments provide certain opportunities that investors should be aware of: Not all asset classes behave the same way, and when you diversify you reap the benefits of lowering risk. International stocks can provide a key source of diversification because they have a less than perfect correlation with the U.S. markets. In comparing price to earnings ratios of international stocks and U.S. stocks over the past 20 years, international stocks look cheap relative to the U.S. Given that the world economy is increasingly interconnected, foreign stocks should be a part of your asset allocation strategy.

Two reasons why people invest internationally are for diversification by spreading your investment risk among foreign companies and markets that are different than the U.S. economy and for additional growth opportunities by taking advantage of the potential for growth in some foreign economies, particularly emerging markets. By including exposure to both domestic and foreign stocks, you’ll reduce your risk of losing money and your portfolio’s overall investment returns will have a smoother ride, because international investment returns sometimes move in a different direction than U.S. market returns. Even when international and U.S. investments move similarly, the degree of change may be very different. You have to balance these considerations against the possibility of higher costs, sudden changes in value, and the special risks of international investing. For most, the best international investment option is a mutual fund. An international fund can reduce several risks such as currency fluctuation and lack of liquidity that individual foreign stocks would hold. Mutual funds provide more diversification than most investors could achieve on their own. The fund manager should be familiar with international investing and have the resources to research foreign companies effectively. The fund will also handle currency conversions and pay any foreign taxes due. As far as how much to have, general rules are between 10 percent and 30 percent in international stocks, but talk to your financial adviser to develop the right strategy for you.

It really depends on your risk tolerance. If you are a conservative investor, then 0 percent to 5 percent of foreign stock exposure would be acceptable. If you are an aggressive growth investor, 25 percent to 40 percent or more may be right up your alley. Another important component in this matter is distinguishing between investing in developed vs. emerging markets. Emerging markets will cause more risk during uncertain times, especially those with unproven economic and/or political systems. I believe that some international exposure is effective because of the way the world economy works. But it is important to remember that many large U.S. companies already have tremendous exposure to and reliance on foreign sales. In that way, you already may have nondomestic stock exposure. It’s very important to get it right when it comes to asset allocation and the classes you are invested in.