Foreign investments: Make certain benefits outweigh risks
Special to the Appeal
With so many U.S. stocks, bonds and mutual funds available, many investors overlook the potential benefits of investing outside the country. I think that this oversight could prove to be a detriment to a long-term investment portfolio.
Don’t get me wrong, the United States provides an array of investment opportunities.
However, international investing offers a broad selection of investment alternatives, the potential for competitive returns, and increased diversification that can reduce investment risk. These are all compelling reasons to explore global investing.
Investing in international markets can increase diversification, and increasing diversification tends to reduce portfolio volatility.
Many investors think investing in international markets is too risky, but that is not necessarily the case.
The ups and downs of stock market cycles are affected by many variables, including investor perception, interest rates, geo-political events, inflation and a host of other economic indicators.
The direction and strength of these variables is not consistent from one country to another, so foreign market movements do not typically mirror those of the U.S. markets.
For this reason, overseas investing can cushion a portfolio against a significant drop in the U.S. markets and vice versa.
This can make it easier to ride out the downturns of any one market. Can you can see where I am going with regard to risk?
The United States is clearly a global economic leader. However, because of the size of the economy, it cannot sustain the rapid growth rates of less- developed economies without triggering inflation. The additional room to grow and opportunity to grow fast are two characteristics of foreign economies that I find attractive for long-term investors.
Foreign countries are also host to some of the world’s leading companies.
For example, while companies such as Nestle, Nokia and Adidas are all household names, each is based in a foreign country.
The potential rewards of international investing are compelling, but you need to be aware of the special risks involved too.
Because each stock is priced in a foreign currency, investors in overseas companies assume currency risk. For example, companies traded on the Japanese market are priced in Yen, so the value of an investment in a Japanese company will hinge partly on the exchange rate between the dollar and the yen.
The exchange rates fluctuate so it can be tricky to evaluate the investment opportunity.
Liquidity is also a variable to keep in mind when investing overseas. Because foreign markets typically have lower trading volumes than domestic markets, it may be difficult to trade certain securities if there is a supply-and-demand issue. In these instances, where volume can be especially thin, profitable trading can be more difficult.
Another concern, and the one that is mentioned to me most often, is political instability.
Major political events such as elections, changes in economic policy or trade agreements, and civil unrest can threaten foreign markets.
As we all know, these events can occur with little or no notice, so international investors must carefully monitor the politics and economy of the foreign markets in which they invest.
The one that concerns me a lot is the lack of regulation in certain markets. Some overseas companies do not face the same type of disclosure regulations that U.S. companies must comply with. That can make research a challenge and more time consuming.
Accounting methods vary from country to country so it can be difficult to see who is cooking the books.
After all that, you are probably saying, why would I want to get involved in all that? There are still many rewards that can balance the risks in overseas markets.
You may want to seek the guidance of a qualified financial advisor who knows and understands foreign markets. Under the guidance of an experienced professional, you may feel more comfortable taking advantage of overseas opportunities. If you would like to learn more about international investing, I can be contacted at 841-4277.
• Carol Perry, a Northern Nevada resident since 1983, represents the firm of Wachovia Securities in Carson City.