Investing 101

Investing Abroad: Benefits And Risks Of International Investing

Investing Abroad

In an economic environment where things are constantly shifting, investors want to find ways to diversify their portfolios and take make money from companies that are performing well in other countries. There’s no rule that says you have to be limited to the investment opportunities in your country. Buying shares of international companies based in the U.S. is one way to go to diversify your portfolio, but it’s also becoming increasingly easy to invest in equities and debt available on overseas markets. This is a great opportunity to take part in booming opportunities in fast growing stock markets around the world. Investing globally puts you in a position where you can benefit from strong performances in multiple markets, not to mention that some markets might perform well when others perform poorly, helping to stabilize your investment portfolio against widespread losses.

Benefits of Investing Abroad

When considering the option of investing abroad, investors like to invoke what I like to call the “rosy scenario”, which is what can happen if all the right conditions are met. In this case you can make money three ways:

1. the investment itself (provided that it is a sound and profitable venture) becomes highly desirable and thus rises in price, providing capital gains
2. the investment pays dividends
3. the country’s currency rises agains the dollar, so that should the investor decide to sell, they get more dollars from the transaction

Another perspective on international investing involves the correlation they have with your local market. Although we’re living in a world that’s increasingly interconnected, all markets do not necessarily move in sync with each other. While one market can be down, another can be up, the correlation depending on what extent those two markets’ economies interact with each other. So if you’re expanding your investments internationally in markets that have little correlation with your own local market, overall you’ll reduce your portfolio’s overall volatility.

You should also consider the fact that not all investment opportunities may be available in your own country’s stock market. For instance, if you’re an American investing exclusively in the US market, you might miss out on the rapidly developing makers of steel and electronic appliances which are not based in the US. Analysts also say that emerging stock markets in China, southern Europe, and southeast Asia have a faster growth rate than the established markets in the US and United Kingdom.

Risks of Investing Abroad

There’s no such thing as risk-free investing, and overseas companies face many of the same realities as do the ones in the U.S. But when deciding to invest abroad, you have to keep a certain number of things in mind.

Probably the biggest risk in investing abroad comes from the potential for political and economic upheavals that less stable foreign countries may experience, which can greatly affect the local stock market. In all honesty there’s not much that can be done agains that, except maybe to stay out of the most volatile countries. Then comes the fact that differences in market regulations and standards could also be a difficulty especially when it comes to evaluating foreign companies: tax treatment of gains or losses differ from one country to the next, accounting and trading rules may differ, market regulation can be loose, information can be hard to find, and so on. Finally, you should not overlook the fact that converting dividends into dollars may add extra cost to the transaction.

How to Invest Abroad

There are several ways for a US investor to invest internationally

• Big US brokerage firms with branch offices abroad that can invest directly
• Some international and multinational companies list stocks directly on US stock exchanges
• Many mutual fund firms offer international funds that invest overseas
• The stock of some of the largest companies is sold as American Depositary Shares (ADSs)

Investing abroad is not without its risks, but so is any other investment vehicle out there. As long as you do your homework and invest in solid foreign companies operating in relatively stable environments, there’s a great potential to both increase your investment portfolio’s value and reduce your risk exposure.

Investing Abroad: Benefits And Risks Of International Investing