There are three important reasons to invest internationally. These are diversification, increased opportunities and exposure to investment techniques not used in South Africa.
David Ross, senior global portfolio manager of Old Mutual Asset Management (UK), says it is essential that you spread your risk geographically as well as across industry groups.
The need for a United States investor to invest offshore is less than that of someone living in a small country because nearly every type of industry investment opportunity is available in the US.
In South Africa if you are confident that the resources sector will bloom continually then there is little reason to invest elsewhere.
However, Ross says this is not likely to happen, so you should be invested in a broader range of sectors, some of which are not strongly represented on the Johannesburg Stock Exchange. Ross says these sectors include health and technology.
But diversification is not limited to the need to invest in a broad span of industries, which go through different growth cycles, but includes the need to invest in different countries, with different growth cycles.
Ross says economic growth between different countries and regions is usually not synchronised. Likewise inflation rates in different countries, which affect currency values, also differ.
Ross says the consequence of this is that stock market performance varies across different countries and regions.
The smaller the country in which you invest, the more vulnerable you become as you have a limited choice of industries and only one currency.
"Greater opportunities to reduce risk and increase returns are available through exposure to new industries, new economies (both developed and emerging) and new investment techniques."