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"Mutual Funds for the Utterly Confused" (McGraw-HIll, December 2008)
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Foreign Investment Risks
In our continuing look at the risks facing mutual fund investors, we now look to investments your mutual fund manager may be making outside of the US and, if you have a mutual fund that is focused  on a global approach to investing (I suggest that these types of funds might a good place to put some of your portfolio in 2009 - I also suggest it in the book as well) you will face what is known as foreign investment risk.
This is a worthy risk
We wanted a global economy and we got one. For better or worse, and we all know how worse it can be, the world doesn't hinge on the US economy, it swings with us. No longer does the world catch a cold when the US sneezes, it is part of the whole illness. Keep in mind that most of the money that fueled the economy over the last several years was funneled into our wallets courtesy of over seas investors.
Foreign investment risk can catch some of us by surprise and as much as I hate to keep saying it, the book really does a much better job of explaining all of the possible problems that can arise from a foreign investment. It could come from any number of different angels, from a crisis in a currencies to mismanaged governments to poor banking to environmental considerations to tax issues.
And because of that, the cost of the fund might be higher. The volatility of the fund will be greater. And the chance that something unforeseen in some other part of the globe might have devastating effects on the fund's holding are not be taken lightly.
Nor should they be avoided. Foreign investment risk, in other words is a worthy risk, albeit in small portions, say 10% or less of a retirement portfolio. If you are younger, the bet is an extremely good one. There is little chance that a long-term investment in a fund with foreign exposure will not pay-off handsomely. The global audience will not be slowed by the recent recession. There are just too many people around the planet who want the kind of lifestyle that we have to allow for this to last too long.
Next up: growth risk
Previously:
Active Trading RisksCounter Party Risk
Derivative Risks
Foreign Investment Risk
Growth Investment Risks
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