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Investing in foreign stocks
carries extra risks

BACK in first grade or so, you learned that the U.S. territory ended where Mexico's or Canada's began. Geographically speaking, that is still true. But when it comes to investing you can find investment opportunities anywhere in the world.

This shouldn't surprise you. After all, we all buy a great many products produced outside the United States, and the companies making those items might be traded on a foreign stock exchange. But there are a lot of foreign companies. How can you know which ones offer the best investment potential? And when you buy shares of international stocks, is there anything special you need to know?

Before investing in global equities, you may want to work with an investment professional, someone with the experience and research abilities necessary to evaluate investment opportunities and risks in an unfamiliar environment. But whether you work with someone or not, keep these points in mind:

» Special risks: Every investment, no matter where it originates, carries some type of risk. But if you're evaluating a foreign stock, you have to consider the usual risk factors -- strength of management, competitiveness of products, history of earnings -- and then look at some special risks, including considerable changes in market value, lack of liquidity, political instability, currency fluctuations, economic climate, foreign taxes and differences in financial reporting standards. (These risks do not include all risks associated with international investing. Talk to your investment representative for more information.) As you'll notice, most of these elements share a high degree of unpredictability, so you can't "plan" for them in your assessment of a foreign stock's overall risk. But you should factor in these uncertainties when making investment decisions.

» Diversification: Some investment principles are universal, and diversification is certainly one of them. By investing in foreign stocks, you can help diversify a portfolio that may be exclusively devoted to U.S. companies. But even within your global stocks, you can diversify -- by company, industry and country. This last item is particularly important; if a country is going through some type of turmoil, the effects can drag down the entire economy and all industries.

» "Hot" regions: Every so often, a particular region grabs the attention of market watchers. The Pacific rim, Latin America, Western Europe, all have taken their turns as "hot" regions in which to invest. However, by the time you get around to investing in these areas, they may already have begun to cool off. And, in any case, a "hot" region does not guarantee a sizzling investment. Evaluate the special risks, diversification and fundamentals before jumping on the bandwagon of a particular country or region.

Ultimately, you'll probably want to limit your foreign holdings to no more than 10 percent to 15 percent of your overall portfolio. The United States represents only 30 percent of the world's economy, which means you could benefit from international investments. Exposure to these investments may also provide additional diversification benefits for your portfolio.