A diversified portfolio cannot rely solely on investments in the U.S. Adding international exposure can increase diversification and lower portfolio volatility. It may be hard to comprehend this notion given the 43.2% decline of the international ETF iShares MSCI EAFE Index (NYSE:EFA), which focuses on equities from Europe, Australasia and the Far East, but the rule still applies for long-term investors. Let's explore how foreign direct investment (FDI) for 2008 can signal where to look for international investment opportunities.

FDI Estimates 2008
According to the United Nations Conference on Trade and Development (UNCTD), FDI is estimated to have fallen by 21% in 2008 to $1.4 trillion. The downward trend for FDI is expected to continue in 2009, but a select group of developing regions showed resiliency despite tight credit markets and economic headwinds.

Developing Nations
FDI to developing nations was estimated to have risen 4% in 2008. Notable inflows were mentioned to have found their way into Africa as well as East and South Asia. Investors can gain exposure to the African continent through the PowerShares MENA Frontier Countries ETF (Nasdaq:PMNA) or the Market Vectors Africa Index (NYSE:AFK). The PMNA ETF focuses on the northern hemisphere of the continent with holdings in Jordan, the United Arab Emirates and Morocco, while the AFK ETF goes a step further by incorporating investment from countries in sub-Saharan Africa like Nigeria and South Africa.

BRIC And Warm Climates
Can a conversation about international diversification really happen without mentioning the BRIC nations? Labeled as developing and transitioning countries in the UNCTD report, the sovereign nations of Brazil, Russia, India and China are also estimated to have incurred an increase in FDI in 2008. The SPDRs S&P BRIC 40 ETF (NYSE:BIK) is one fund that grants investors exposure to all four regions.

Warm climate regions of the Caribbean and Latin America are estimated to have incurred a 13% increase in FDI. The iShares Latin America 40 Index (NYSE:ILF) is a well-diversified ETF with a heavy concentration in Brazilian and Mexican-based companies.

The developed regions of North America and Europe have incurred an estimated 33% slowdown in FDI. Here's an opportunity for equal opportunity investors who choose not to ignore large ETFs like the SPDRS S&P 500 ETF (NYSE:SPY) and the EFA ETF mentioned above despite the drop in FDI.

Final Thoughts
FDI can be used as a starting point for investors developing and tweaking their foreign exposure portfolio. Keeping in mind the additional political, economic and currency risks of international investments, as part of the planning process the amount of exposure taken by investors must be measured against their risk tolerance and their investment horizon. International diversification can lower portfolio risk, but investors must have time on their side to witness the impact on their investment holdings.

For more on international diversification and investing, read our related articles Going International and Finding Fortune In Foreign-Stock ETFs.

Related Articles
  1. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  2. Professionals

    5 Top-Rated Funds for Your Retirement Portfolio

    Mutual funds are a good choice for emotional investors. Here are five popular funds to consider.
  3. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  4. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  5. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  6. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  7. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  8. Chart Advisor

    Bumpy Roads Ahead In Transportation

    Investors are keeping an eye on the transportation industry. We'll take a look at the trend direction and how to trade it.
  9. Investing

    How ETFs May Save You Thousands

    Being vigilant about the amount you pay and what you get for is important, but adding ETFs into the investment mix fits well with a value-seeking nature.
  10. Mutual Funds & ETFs

    3 Fixed Income ETFs in the Mining Sector

    Learn about the top three metals and mining exchange-traded funds (ETFs), and explore analyses of their characteristics and how investors can benefit from these ETFs.
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!