Investing in securities from different countries offers more benefit than investing in securities from a single country. Why can this statement be true? (related to the concept of correlation)

 

Two of the chief reasons individual investors invest in international investments and investments with international exposure are: 

1. Diversification; which involves spreading investment risk among foreign companies and markets in addition to U.S. companies and markets
2. Growth: this involves taking advantage of the potential for growth in some foreign economies, particularly in emerging markets

International investment returns may move in a different direction, or at a different pace, than U.S. investment returns. In that case, including exposure to domestic and foreign securities in a portfolio may reduce the risk that an investor will lose money if there is a drop in U.S. investment returns. A portfolio's overall investment returns over time may have less volatility.

Step-by-step explanation

There are three types of markets for international investments:

Developed markets consist of the largest, most industrialized economies. Their economic systems are well developed. They are politically stable, and the rule of law is well entrenched. Developed markets are usually considered the safest investment destinations, but their economic growth rates often trail countries in an earlier development stage. 

Emerging markets experience rapid industrialization and often demonstrate incredibly high levels of economic growth. This strong economic growth can sometimes translate into investment returns superior to those available in developed markets. However, investing in emerging markets is also riskier than in developed markets. There is often more political uncertainty in emerging markets, and their economies may be more prone to booms and busts.

Frontier markets represent "the next wave" of investment destinations. These markets are generally either smaller than traditional emerging markets or are found in countries that place restrictions on foreigners' ability to invest. Although frontier markets can be exceptionally risky and often suffer from low liquidity, they also offer the potential for above-average returns over time. Frontier markets are also not well correlated with other more traditional investment destinations, which means that they provide additional diversification benefits when held in a well-rounded investment portfolio. Examples of frontier markets include Nigeria, Botswana, and Kuwait.