Diversifying your investments is one way to strengthen your overall portfolio, and it’s one of the most popular in today’s economic climate. Aside from varying your investments between stocks, bonds, and cash accounts, however, another popular option is to invest in one of the 21 major stock markets that exist outside of the United States. Foreign investments can yield good return for an investor who is willing to put the time and effort to properly research a foreign market investment opportunity.
Basic Foreign Market Investment Principles
U.S. and foreign markets lack correlation (i.e., if one market is up, they other may be down). However, this does not mean that because one market is up the other is always down. Academic studies have shown that over the long term, diversification via foreign investing is a smart way to help ensure a strong portfolio.
Of course, there are risks associated with foreign markets, too. All investment opportunities, domestic or foreign, involve some risk. In foreign market investments, exchange rate is one of the biggest risks, as a U.S. investor’s return is affected by the value of the U.S. dollar versus the value of the other country’s currency.
In addition to the exchange rate, there are other factors that affect foreign market investment, as well. For example, the sociopolitical atmosphere of a country can affect foreign markets; this is called country risk. Also, different countries have different accounting conventions. An understanding of the foreign market’s accounting conventions can also be vital for stock analysis.
How to Invest in Overseas Markets
If you decide that investing in foreign markets makes good sense for your portfolio, there are some very strict rules and requirements for entering into the foreign investment markets. In most cases, you’ll want your financial advisor to handle most of the steps.
- ADR – American depository receipts (ADR) are a way to make foreign markets accessible to American investors. They are stocks of foreign companies listed on both the New York Stock Exchange and the NASDAQ. Companies with ADRs are subject to the same accounting conventions as U.S. based companies. Though they are bought, sold, and held as though they were regular shares of U.S. companies, ADRs act more like the foreign stocks that they are based on.
- U.S. Traded International Stocks – The New York Stock Exchange and NASDAQ do list a few foreign stocks on their exchanges. These stocks meet the U.S. Exchange standards.
- U.S. Multinational Corporations – Another way to enter foreign investment markets is to buy shares of multinational corporations. Though these companies may be based in the United States, many of them generate revenue throughout the world, making them an effective and easy way to gain exposure in the global market.
Foreign investments certainly aren’t for those who prefer low-risk investments. However, they can provide a way to diversify your portfolio beyond the traditional scope. Like all good financial decisions, you should fully research and consider your options before moving forward with any plan.
Questions? Email me at wesley@thewandwgroup.com and visit our website at http://www.thewandwgroup.com
New Money Talk is a weekly article focusing on retirement, personal finance, and estate planning.
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