FOREIGN INVESTMENTS

One of the tricky parts in investing overseas is that your funds are all earned and returned in foreign currently. If the dollar increases in value or if a foreign currency drops in relationship to the dollar, all your gains can be negated- even showing a negative return for the year. A FED reserve board article last year said that there was also no correlation in U.S. rates and the movement of any foreign currency so it was next to impossible to know what currency would do when and by how much. Anyway, CFO magazine noted that 50% of returns on foreign equities and 70% of the returns from fixed income investments since 1986- positive or negative- were due to changes in exchange rates. "If a pension fund has 15% of its assets in vested overseas and its mix is 70% equities and 30% bonds, the fund's foreign exchange exposure will account for 1.2% of its returns." That's why you limit your exposure to 10% to 25% of an entire portfolio in foreign investments.