Since the Internet made the global conversation accessible to average people, it has also brought the financial, corporate and governmental realities of each country into a condition of much greater transparency. At a lunch counter in Springfield, Illinois, patrons might be just as likely to discuss whether the Chinese will ever let their currency float as to wonder aloud about the state of the U.S. deficit and its effect on the economy.
In the United States, the domestic stock indexes include the Dow Jones Industrial Average, Transportation and Utilities Averages, the Standard & Poor's 100 and 500, the Nasdaq Composite and many others. In China, the Hang Seng is a domestic stock index; the Nikkei 225 is a domestic index in Japan. Domestic indexes provide a centralized display of a country's commercial health — a listing of the stocks of the country's major corporations.
As each index represents the commercial might of its country, it also reflects the trading character and customs of its people. It is often difficult for a U.S. investor to understand the movements of the Middle Eastern and Asian stock markets. It is just as difficult for a Chinese investor to understand U.S. stock market movements. The approach to choosing a stock is slightly different in each culture. What may be a fortuitous sign in one country may be ignored in another.
Differences between cultural approaches to investing are breaking down as investors everywhere become global citizens in their hunt for good investments. Trying to invest in a foreign-domiciled stock is a bit like being a long-distance landlord, in that you never really know what is happening to your property. Communications technology has changed that, somewhat. While it may still be difficult to appraise individual foreign stocks with the same natural instinct you would use when buying the stock of domestic companies, the stock indexes serve to smooth out differences and difficulties. They present a way to invest in the future of the country via investment in index mutual funds that represent that country's stock indexes.
In every country, on every stock exchange, there are stock indexes. Some are broad representations of all major industries and some are specialized in utilities, industrials or even green companies. Other indexes differentiate themselves by the size companies they list. If you are seeking to broaden your investment exposure to balance out geopolitical and economic risk, select a mutual fund that invests in a stock index of a country you feel will grow in economic importance. Diversifying your portfolio through buying index funds relating to many different countries is an excellent way to moderate the risk of having all your money invested in your own country.
- Comstock/Comstock/Getty Images