Investing abroad is one of the most daunting ventures for one to undertake. With the added obstacles of different languages and currencies to deal with, it’s no wonder that most people think twice before attempting such an endeavor.
Fortunately, there are many good-enough reasons for anyone to invest abroad. International stocks have an added opportunity; for instance, U.S. stocks represent approximately 30% of the total value of global markets. The majority of companies that make and sell electronics or consumer appliances are based outside of the United States, in countries such as South Korea and Brazil.
From a management perspective, investing in foreign markets is a way to diversify. For example, international and U.S. shares do not always move in sync. When one is up, the other might be down, and vice versa.
That does not mean, however, that foreign shares always move in opposite directions. Many countries rely heavily on America for imports and exports and can be susceptible to the U.S. market shifts. In today’s economy, stocks often move in the same direction, especially when the U.S. is experiencing pressure on the bull market. Recent academic research shows that foreign shares, nevertheless, are sufficiently independent so that investing abroad can smoothen portfolio returns over a long-term period.
Mentioned below are seven ways to diversify your financial portfolio:
Diversify Mutual Funds
One of the most common means of investing in foreign markets it to purchase exchange-traded funds (ETFs) that hold a basket of international bonds and stocks. ETFs along with mutual funds provide investors with a highly diversified international component to their portfolio in just one simple transaction, while carrying foreign holdings across multiple countries and industries.
Investors have a choice to pick between many different types of ETFs or mutual funds, including:
- Country Funds: invest in specific countries like Spain or Russia
- International Funds: invest in many countries outside America
- Regional Funds: invest in specific regions like Middle East, Asia, or Europe
Long Distance Research
Compared to individual companies like Samsung or Italy-based UniCredito Italiano, it is easier to gauge how the broad market will fare in both South Korea and Italy though internet-based “long distance” research.
Many countries have a benchmark index such as DAX in Germany or the Nikkei 225 in Japan. Additionally, many international investors tend to use the MSCI set of global indices as guiding factors for foreign investing.
The Depository Receipts
American depository receipts – mostly known as ADRs – suit not only the investor gimmick but the non-U.S. company dynamic as well. ADRs offer investors a rather convenient way to hold international stocks while providing an opportunity to organizations outside America to establish a U.S. presence and raise capital in the country’s stock markets. For example, the Alibaba Group Holding Limited (BABA) is currently raising capital via an IPO and trading in the U.S. as an ADR.
The ADRs – sponsored or unsponsored – have three different levels, depending on the requirements by the foreign companies’ access to U.S. markets. Level 1 ADRs are only traded over the counter, while level 2 and 3 ADRs are both listed on an established stock exchange like AMEX or NASDAQ. Only level 3 can be used to raise capital.
There are two main ways by which investors can directly invest in foreign stocks. The first involves opening a global account with a broker in their own country, providing the ability to buy foreign shares. Another alternative is to open an account with a local broker in the target country that offers services to international investors; for instance, the Boom’s Trading Platform in Hong Kong or OCBC Securities in Singapore.
Based on interest and individual investing style, investors need to pick the right trading platform in addition to the facilities provided by the brokerage firm. However, the system is complicated, and it isn’t advised going directly to casual investors.
Exchange Traded Funds
For investors, international exchange-traded funds are often a convenient way to access foreign markets. Choosing the right exchange-traded fund is easier for investors than building up a portfolio of stocks by themselves. Some ETFs offer more concentrated bets – on a particular country – than just being a source of global investment. There are many international ETFs within various categories like investment style, geographical region, and sectors.
In case you are comfortable with investing in individual foreign-based companies, you must understand how the markets for international stocks operate. Foreign stocks are usually traded on a home-country exchange and referred to as ordinary shares. The latter is denominated in the home-country currency. Many foreign stock companies list this stock in the U.S. security banks; also known as ADRs.
Index Style Funds
Even though some foreign issues are traded in the United States, most experts say that ordinary American investors should rely on mutual funds and exchange-traded funds.
Some experts suggest index-style funds, with allocations reflecting foreign market shares of global stock assets. Some of the index funds focus primarily on countries and specific regions, while others specialize in developed markets or emerging ones.
All in All
Investors should know about the product or market before investing. Moreover, knowledge about the economic and political conditions in the place of investment is essential to understand the factors that directly or indirectly impact investment returns. Investors must focus on the costs and objectives, balancing it with their risk tolerance.
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Wayne Terrysson is a marketing manager at CouponoBox, a daily deals and coupons providing website. He is a thought leader in the realm of content marketing and strategy and relishes inditing about technology, marketing, and perpetual industry trends. He’s a techy geek and loves to explore latest happenings.
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