Investments in countries other than the United States make an important component of your diversified portfolio. Historically, investors in the United States have allocated only a small part of their portfolios to international stocks, feeling that economic growth in the United States was a better bet. This is no longer the case. The economies of Europe and Asia are seen as very appealing investments and the availability of professional investment managers through mutual funds have opened overseas markets to U.S. investors.

Types of Foreign Markets

There are basically two types of international markets: developed and emerging. The economies of developed countries are more similar to the U.S. economy than smaller, riskier economies of emerging countries, but they still offer diversification. Owning companies in developed countries gives your portfolio exposure to different currencies and economic cycles than in the United States. When the U.S. economy is slowing, European or Asian economies may be growing. Emerging economies are riskier, but small amounts can be good in your portfolio.

Indexes to Watch

The MSCI EAFE index is calculated by Morgan Stanley Capital International — hence the MSCI — and measures the performance of markets in the developed countries of Europe, Australasia, and the Far East. Morgan Stanley's MSCI Emerging Markets Index tracks emerging economies such as those of Argentina, Brazil, Chile, and South Africa.