International investing can undoubtedly be a precarious venture due to currency conversions, language obstructions, and forex and regulations. Despite the complexities of international investment, ask any financial expert and he will advise you to hold at least a few international stocks in order to diversify your portfolio in a perfect manner. If you seem to be interested, you need not fret, as there are easy procedures of investing abroad in foreign markets without the requirement of choosing a new language and exchanging dollars for euros!
Your investments are more like your vacations, and hence, you would probably love to take a few of them outside the U.S. If you’re someone who is only investing in America, you’re probably ignoring more than half of the good quality investment stocks in the entire world. Experts and analysts always say that investing is all about selling high after buying low. Of late, foreign markets are the best places for the most obvious bargains, as the American markets are hovering at their all-time highs.
Analyzing the promising international opportunity.
Well, among the thorniest decisions that investors make is whether or not to invest their money in foreign stocks. Though it can be extremely lucrative, it goes without saying that the rewards are mixed with added risks – and spotting noteworthy foreign investments can take a tad more effort than locating them at home. You need to know that there are enough worthy reasons to invest overseas. American stocks account for only 30% of the entire global market value. In fact, you’ll be rather surprised to note that the big shot companies which manufacture electronics, steel, or other consumer appliances are all based outside the United States, around South Korea and Brazil.
There are more than a dozen stock markets outside the U.S. which sport more than a thousand companies of extraordinary size. The majority of these companies operate in economies which are rapidly expanding with sky-high rates of return. So, why would you make the mistake of passing on them at any cost? From the perspective of portfolio management, foreign company investment is the best way to diversify. Foreign shares and U.S. shares won’t always move in sync. One may be down when the other is up, and technically, such markets lack equation.
Is it a smart money decision to invest in foreign stocks?
Financial authorities and institutions like the Securities and Exchange Commission deem foreign investment as advantageous, as they reduce volatility and increase growth potential. Let’s take a look at what the experts have to say about whether or not international investment is a smart money decision.
- Portfolio diversification will always pay off: Putting all your eggs in one basket is perhaps the biggest blunder that an investor can make. Your U.S. market is one basket which comprises of bonds, stocks, and currencies, but it is sound management of your portfolio to spread the risk – minimizing its effectiveness at any one particular point. This decision might be questioned in the domestic market, but something that moves up will always come down. Although the American market will rectify the foreign ones, this is when portfolio diversification will pay off.
- Foreign stocks are astonishingly profitable: When you pass on the investment opportunities beyond your country borders, you miss out on more than half of the most lucrative markets. Did you know that foreign equities are able to offer you an added layer of diversification for the profiles of the investors, and they can even diminish risks by offering greater returns? To capitalize on this, invest in foreign stocks.
- Rate of returns may not override investment profits: American investors might think that it’s fine for them to limit themselves to only U.S. stocks, but little do they realize that adding international stocks can help them diversify and get low volatility in the long run. Such efforts will definitely translate to increased returns over time.
- Smaller investors can get exposure through foreign stocks: The majority of U.S. investors don’t have large enough portfolios to include yet another international stock into their investment strategy. Hence experts recommend you to understand the benefits of diversification of foreign index funds. Index funds provide diversified international exposure to smaller investors.
- The key to investment is a well-balanced portfolio: Although there is a huge run-up in the American markets, experts like Justin Goodbread of Heritage Investors believe that a portfolio that calls itself well-balanced should include both international and domestic equities. When the international equities start rising, you’ll start getting awesome returns.
Deducing the international risk.
Now that you know the multifarious benefits of investing abroad in foreign markets, you should now also appreciate the risks that are involved in it. Keeping the beginners in mind, the exchange rate is the biggest risk factor. For an American investor, his stock return from an international country is definitely tied to the changes in the values of the currency between the foreign country’s currency and the U.S. dollar. For example, if you purchase a Japanese stock and then the Japanese yen rises, your rate of return will be much more. Similarly, if the yen falls in value, you’ll be the loser.
Besides the turmoil in the currency markets, you also have country risk. There are many nations outside the U.S. that suffer from social, political, and economic volatility – which thereby increases the risk of investing in those countries. Before investing in such countries, you should know how to evaluate the country risk for foreign investing.
When you consider how tough investing in your homeland can be, spotting the best companies in a foreign market will clearly not be a walk in the park. International governments have different tax regulations and reporting on securities. Often it is seen that overseas companies can use various accounting processes which can become tricky for overseas stock analysts. Hence, before investing in an overseas market, it is crucial for you to have a sound sense of that country’s investment habitat.
Since foreign markets have a lack of direct interaction, investing abroad can definitely be a lucrative way of portfolio diversification. However, since you will be exposed to some risks as well, you have to ensure that you do your due diligence and make an informed and weighed decision.
Allan is an experienced blogger, and he notes down his thoughts on a regular basis through his blog Day to Day Finance. At its core, writing is a part of communication. Allan loves to communicate with people via his write ups. He shares his thoughts, advice, tips, and tricks related to finance, marketing, lifestyle, and many other topics which are closely related to daily life. He believes blogging helps a person to think deeper, which is the reason he loves to write so much.