Are you apprehensive about investing internationally? Perhaps it’s because you think it will be too risky or complicated. You may also wonder why you should invest outside the United States if domestic stocks are already performing well.
In reality, there’s a possibility investing internationally could actually lower your overall risk as an investor while increasing your returns.
There are various methods of investing internationally: through mutual funds, American Depositary Receipts, exchange-traded funds, U.S.-traded foreign stocks, or direct investments in foreign markets. A financial professional can break each one down for you and help you decide which ones would be good fits for your portfolio.
Before you get started, here is an explanation of some of the advantages of international investing, as well as the risks.
1. Diversification – Spreading your investment risk among foreign companies and markets that are different than the U.S. economy could be a wise move, as it can potentially reduce your overall risk. Since international investment gains sometimes travel in a different direction than domestic market returns, having a stake in a broader range of foreign business sectors in addition to domestic companies provides greater variety to your portfolio and could open the door for potential future gains.
2. Growth – By investing internationally, you are taking advantage of the potential for growth in foreign economies, particularly in emerging markets. Markets go through different cycles, and when the emerging foreign markets are hot, they can easily outperform the S&P 500. During those growth periods, investments with exposure to those markets have the potential of producing more returns than investments simply tracking the S&P. Even when the U.S. stock market is flat or down, overseas markets may be up.
3. Potential – There are some overseas companies with potential to do great things. They may possess fresh ideas and motivation that certain domestic sectors lack. Some foreign companies are also the leaders for particular industries, or they may be able to market a U.S. concept with better success from their shores. Investing in these types of foreign entities may just give your portfolio the boost it needs.
Substantial market changes – Foreign markets can sometimes be less stable than domestic ones and experience large ups and downs in market value. Major market shocks from such situations as geopolitical events may affect foreign markets more heavily.
Rather than trying to “time” the market with foreign investments, consider investing for the long term in order to endure the market’s dramatic upswings and downturns. That way, you’ll have more of a chance of reducing the impact of these sudden market changes.
2. Liquidity – Many foreign markets may seem small and insignificant compared to Wall Street, with lower trading volume, shorter trading days and fewer listed companies. Some countries limit the amount of stocks foreign investors may purchase, and you may have trouble finding a buyer when you want to sell.
Also, because they’re not always required by law to disclose certain facts, foreign markets are known for lacking sufficient information about their companies that U.S. investors are accustomed to having at their fingertips with domestic stocks.
3. Exchange rates and fees – Your investment return can be dramatically affected by changes in the exchange rate between foreign currency of an international investment and the U.S. dollar.
For example, when you sell your international investment, you must convert the cash you receive into U.S. dollars. During a time when the foreign currency is strong compared to the U.S. dollar, your investment return will increase because your foreign earnings translate into more dollars. But it can go the opposite way as well. Some countries may also impose foreign currency controls that restrict or delay investors from moving currency out of a country.
Overseas investing can also cost more for investors because of the extra expense for a U.S.-based brokerage firm to do business in foreign countries. Some investors may even have to deal with withholding taxes on dividends, or paying premiums for certain shares of popular companies or mutual funds.
Still want to invest? Here’s the next step:
You should thoroughly research foreign companies before deciding to invest. Educate yourself about the political, economic, and social conditions in the company’s home country so you will be able to comprehend the reasons behind its financial results and stock price.
If you choose to invest in foreign mutual funds, make sure you understand which countries the fund invests and the types of investments it makes.
The bottom line is you should weigh both the advantages and risks of international investing to decide whether it’s a good move for you. Talk with a financial professional about how these types of investments could be a good fit for your portfolio.