Should You Invest in International Mutual Funds?
Or Are Individual Stocks a Better Choice?
International investing can be a great way to diversify your portfolio and discover new opportunities. These investments can be securities that you, otherwise, might have missed by sticking only to in-country investments. Once you’ve decided to go global, one of the first decisions you need to make is whether to pick stocks by yourself or invest in a global or international mutual fund.
Your Investing Approach
The answer to what type of international investing you do will depend a lot on your approach to investing. While some investors like to do their research and make their own decisions, many others prefer to let a professional fund manager do the stock picking.
There’s no single “correct” answer for everyone. In fact, many successful investors own both stocks and mutual funds. The most important thing is to have a consistent investing strategy—and sticking with it. The last thing you want is a random collection of stocks and funds without a clear idea of what you’re trying to accomplish.
International Mutual Funds
International mutual funds offer two big advantages for small investors. The first advantage is access to professional management. The second advantage is instant diversification. When you invest in an international stock fund, you are buying a slice of a larger, more diverse portfolio than you could ever hope to assemble on your own.
What’s more, all of the investment decisions are made by professional portfolio managers with experience in global markets. Many fund management firms have teams of research analysts located all over the globe. The analysts help the firm find the best companies in which to invest.
Even though the case for investing in a fund is so compelling, some investors still want to pick their own international stocks. One reason is the ability to customize your portfolio. Buying a fund is like buying a suit off the rack. While there are a lot of different choices available, you don’t have any say in how the suits are made.
Here’s an example. Let’s say you’re bullish about China, but you’re not so optimistic about Europe. Buying a diversified international fund won’t allow you to implement this sort of strategy. Instead, your fund manager might be heavily invested in Europe and have no exposure to China. Also, since funds are only required to report their holdings twice a year, you’ll never know exactly what your fund manager is buying until it’s too late.
Of course, this isn’t necessarily a bad thing. After all, your fund manager may be right, and your research may be wrong. In that case, you’d be glad they invested in Europe instead of China. But it's important to remember that with mutual funds, most of the decision-making is out of your hands.
Consider Annual Costs
A second argument for picking stocks instead of funds is the cost. Mutual funds charge annual management fees for their efforts—and some may be more expensive than others. The average international fund incurs annual expenses of about 1.5% based on the total of the fund's assets. So when you invest $10,000 in a fund, $150 goes into the management firm's pocket each year.
That might not sound like much, but if you’re investing for a long horizon, those fees can add up to serious money. When you buy individual stocks, however, you pay the brokerage commission once, and then you’re done until you decide to sell.
If you’re an absolute beginner, a good diversified international mutual fund is your best bet. But as you become more comfortable with researching investments, you may want to add some individual stocks into the mix as well.