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.

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