You don’t have to be Warren Buffett or Mark Cuban to realize the value of investing your money and creating future wealth. Many people don’t understand that investments go far beyond the United States.
Foreign markets and companies are more than happy to have American dollars flow into them and can pay off if you make the right moves at the right times.
Of course, just like investments in the US, there are risks when participating. In this blog, we’ll break down how you can invest overseas, along with the positives and negatives of doing so.
How to Invest Internationally
The US government recognizes the right for Americans to invest overseas and has created several different products to make that possible. But there are also plenty of opportunities to trade foreign stocks without going through an American portal. Here’s a brief look at some of the ways to send your money beyond US borders.
- American depository receipts (ADRs): ADRs are the representation of shares of foreign stocks that are traded in the US markets. The price of each ADR reflects the stock price in its home market, adjusted by a ratio of the ADRs to the total number of shares in the company. You can buy ADRs from any US broker.
- US-registered Mutual Funds: There are mutual funds that contain foreign companies but are still subject to US regulations that protect investors.
- International Index funds: These track a specific foreign market or an international market index. For instance, the Schwab International Index Fund follows the MSCIEAFE index, which includes securities in 21 countries spanning Europe, Eastern Asia, and Australasia. These indexes are typically broken into three categories based on the type of funds they contain. Some examples include:
- Global funds: These invest in both US and foreign companies.
- International funds: These invest in companies outside of the US.
- Regional/country funds: These focus on stocks in a particular country, like UK or Australia, or a specific region, like Scandinavia or sub-Saharan Africa. These can be useful if you think a specific country is on the verge of future growth.
- US-traded foreign stocks: Companies in other countries list these locally to the US exchanges to encourage foreign investors.
- US-registered ETFs: The same principle as US-registered Mutual Funds, except they trade throughout the day and can fluctuate dramatically.
- Foreign market investing: Go straight to the source by investing on a foreign stock exchange. Some US brokers can assist you, or you can find help internationally online. But every country has different rules, so do as much research as you can before putting down money.
Why Invest Internationally?
Why do people seek to send money out of the country into other stock markets? There are several logical reasons depending on what your investment goals are.
- Diversification: Most investment analysts agree that diversification is the smartest way to guarantee growth over time. If you have all your money in one company or one industry, what happens when there’s a scandal, a controversy, or a tragedy surrounding it? The US investment environment is vast, but anyone who had money in the market during the Great Recession can tell you that America is no more fail-proof than anyplace else. During the recession, some people saw their investment portfolio drop as much as 60%. Imagine being two years from retirement when your 401(k) drops from $500,000 to $200,000 in a matter of days. While many countries fell into the recession with the US, not all of them did. Spreading your wealth around the world helps you stay safe when some securities struggle.
- Foreign markets outpace American ones all the time: Patriotism is one thing; thinking America is the only country in the world to invest in is a little short-sighted. Other countries and international organizations are in business for the same reason as state-side firms: to make money. Some are wildly more successful than the average US firm. There are lots of smart investments in the foreign market based on their historical earnings that can be a vital component of your portfolio.
Negatives of International Investing
While investing overseas can diversify your portfolio and give you insight into plenty of indexes and growth opportunities you wouldn’t get in the US, that doesn’t mean there aren’t risks involved.
All investing has inherent risk, but international investment has a few negative that must be accepted and overcome.
- Liquidity Risk: Liquid stocks and other investments are things you can turn into cash by selling them quickly. If you’re investing in US funds, liquidity is usually an easy task to accomplish. However, every country has different rules on how and under what conditions you can sell assets. When you add in complications like different time zones, government regulations, and each company’s specific rules and you could find yourself holding the bag when you’re trying to get out of a position.
- The Volatility of Currency: When you invest in a foreign commodity, you take your US dollars and exchange them for foreign currency at the existing exchange rate. That exchange rate will change all day, every day as long as you hold the stock. What can be a problem is if it tumbles in value during that course of time. If that’s the case, when you sell your stock and get your earnings back, the number of dollars you receive might be sizably less than you expected. Financial advisors say the way to avoid this is by hedging your currencies by diversifying ones that are typically strong against the US dollar with those that are more fly-by-night.
Transaction Costs: Most of us don’t pay that much attention to these fees when we at through a domestic broker. $6 here or $10 there doesn’t put too much of a dent in our process. That’s not the same in foreign markets, who are happy to tack on plenty of fees, levies, duties, and commissions to foreign investors to ring up more income for themselves and their clients.
For instance, a brokerage commission for a US investor in Hong Kong might run $35-40 plus fees for transactions, trading, and stamp duty that run another 10% of the purchase. When you’re investing overseas, make sure you check on the fees before making the investment.