At some point, every investor wonders if he should invest in foreign companies. It’s not uncommon to hear about the great profits that can be made, though those profits can come at additional risk.
Stocks in the United States only account for about 30% of the total value of the stock in the world. So, more than 2/3 of the stock value is outside our borders. That’s hard to ignore if you’re a serious investor.
In fact, many of the largest companies in the world, especially those that make electronics, steel, and perform mining are outside the United States. There are over a dozen significant stock markets based in other countries. More importantly, many of these companies operate in economies that are growing very rapidly.
Wouldn’t it be nice to always be investing in economies that are moving in a positive direction?
Foreign companies are a good way to diversify. They also lack correlation with the US markets. What does that mean? It means they don’t go up and down together, so when the US markets are down, it’s likely to be up somewhere else. Of course that doesn’t mean they’re always opposite each other.
The United States has significant economic impact on the rest of the world, but research shows the foreign markets are independent enough that they can help even out your portfolio over time.
There is additional risk with investing in foreign markets:
1. Currency risk. If the currency of your foreign company goes down in value relative to the US dollar, you’re likely to lose money. But you’re more likely to make money if it goes up.
2. Country risk. Country risk can include these important factors and more:
* Many countries have unstable political climates.
* Some are very prone to getting earthquakes and typhoons.
* The country may be unstable economically.
Do you think it’s tough to evaluate a company in the USA? In many foreign countries, businesses aren’t as regulated and aren’t required to provide the same information to investors as companies here. Even worse than no information is inaccurate information; the quality of the information you’re given is likely to be of questionable validity.
It’s also important to consider the tax implications. Every country has different laws; some won’t tax you at all, while others might impose very high taxes and fees on your investments. It’s really a function of how interested they are in having foreign investors. So in doing your research on the companies involved in your investment, also look into the tax consequences.
If you’re hesitant to dive in and buy stocks on the foreign markets, there is an alternative, though it can be somewhat limited. American depository receipts (ADRs) are a way to buy shares in foreign companies on the US stock exchanges. These companies generally comply with the US reporting laws and regulations, so the information you get may be more accurate.
With ADRs, you’ll typically be limited to the larger and more well-known companies. For example, if you buy Sony stock in the United States, you are buying ADRs.
Also consider that you can get some international exposure by purchasing shares of US companies with large overseas operations. Coca-Cola is a good example; over half of their revenue is from foreign operations.
Investing in foreign stocks can be a great way to diversify your portfolio. The rewards can be great, but you’ll have to put in a little extra time to get the information you need to make wise decisions.
It won’t be long before you’ll be telling your neighbors about your holdings in Russia and Brazil. Do your research and then diversify with foreign stocks!