The easiest way to gain overseas exposure in your portfolio by going into Australian based managed funds which invest in foreign stocks. Other countries have very different investment rules to us, and some don't allow foreign investors at all. Unless you really know what you are doing you can be ripped off by shysters on every continent of the world. Asia, Africa and South America are still largely untamed markets and it would make sense to leave investing to people with local contacts, unless you want to be taken advantage of.

Unless you want to enter into foreign investments as a full time occupation, it might be easier for most people just to go with a managed fund. If you aren't happy just to take a passive approach, there are many opportunities to do research of your own in trying to find which international or global fund is most suitable for you.

A distinction is often made between international and global funds. The difference is not just hair-splitting, there is a fundamental difference, my preference is to go with a global fund.

An international fund will invest anywhere in the world except right here. They will invest in all sorts of places but deliberately not buy a domestic stock under any circumstances. I don't like this restriction as the whole point of investing internationally is to gain an amount of diversification. If a good stock is available locally, I think it makes no sense not to consider buying it.

A global fund recognises no borders. If an Australian stock looks good, they will buy it. Good global managers like the Templeton funds and Platinum rank all the stocks in the global universe, selecting from them without any great attention to fixed country asset allocations, simply following good value or growth wherever they find it.

One important question to consider is should you go for a currency hedged fund or an unhedged one?

If you buy an American fund which is not hedged, and the American dollar rises compared to the Australian dollar your returns will be boosted by this currency effect. This is exactly what has been happening for many years as our dollar has continued to slide.

Now we are at a point where everyone is saying that the Australian dollar is undervalued and have a million graphs to "prove" it. I have no idea if this is true or not because I don't know how to calculate fair value on a currency, but nevertheless this is what they are saying.

If the Australian dollar is undervalued and is going to rise against the American dollar, the returns of your American dollar fund will be hurt by our rising currency. Even if the US stock market goes up wonderfully a large jump in the value of the local dollar could give you low or even negative returns.

So right now people are running around saying you should be buying funds that hedge the Australian currency, so the only fluctuations you get come from stock market movements, not currency fluctuations.

If you agree that the Australian dollar is going to rise against the US dollar then go ahead and hedge, but I am not certain one should do this.

First of all, despite the confidence with which people say the Australian dollar is undervalued, nobody can be all that sure. The economists' models might show that but at the end of the day predicting currency movements is a very dangerous profession.

I consider currency fluctuations to be an important part of diversification. The reason why we put some of our money off shore is to protect us from local economic problems. As I write this article Argentina is going through yet another crisis, and people of that country are all wishing they had bought gold or something of "real value" to compensate for their collapsing Peso.

Rather than gold most Argentinans would be better off if they had been buying unhedged international funds, because these have a long term investment return superior to that of metallic gold and also because as the Peso falls the relative value of these will keep track with the foreign currency in which the funds are invested in.

Now I am not saying that Australia is heading toward a crisis of the magnitude that has affected Argentina (or many other smaller markets over the years), all I am saying is that it is prudent to keep at least a portion of your assets in unhedged foreign funds, especially if the country in which you have invested is Europe or the USA (though I probably wouldn't recommend putting a huge portion of your net worth into unhedged emerging market funds).

Of course fence sitters could always half hedge their portfolios, by putting half of their money into hedged funds and half into unhedged funds - though remember that any money you have invested in Australia is already fully hedged (of course) so if you have 50% Australian and 50% international assets, and you hedge half your international assets then you would be left with only 25% of your portfolio in international currencies. Ask an Argentinan if they think that is a good idea.