Articles: Investing around the globe
For years, some investors have been "broadening their financial horizons" with international investments. As economies around the globe continue to intertwine, the trend is becoming more commonplace.
Two of the main reasons for investing in foreign markets are diversification and potential growth. Through diversification, you can spread investment risk. At the same time, you may take advantage of the potential for growth in certain foreign economies, especially in emerging markets.
By including both domestic and foreign stocks in your portfolio, you may be able to smooth out some of the inherent ups and downs of equity investing. That is because foreign market returns may move in a different direction from U.S. market returns. Furthermore, even when international and U.S. investments move in the same direction, the level of change may vary.
Nevertheless, if you are going to add a foreign flavor to your portfolio, you must consider other factors, such as the possibility of higher costs, dramatic changes in value and special risks involved in international investing. Here are several special risks to contemplate:
Currency exchange rates: When the exchange rate between a foreign currency and the U.S. dollar changes, it can increase or reduce your investment return. In times when foreign currency is strong compared with the U.S. dollar, your investment return effectively increases, because foreign earnings translate to more dollars. But the opposite occurs when the U.S. dollar is stronger.
Market value: As with U.S. markets, foreign markets can have wide swings in value. To reduce the impact, focus on investing for the long term.
Outside events: Political, economic and social events can all have significant impact on your investments in foreign markets. This variable is often difficult to account for and must weigh heavily in your investment decisions.
Lack of liquidity: Foreign markets often have lower trading volumes and fewer listed companies than do U.S. markets. Also, you may have to pay higher prices to buy a foreign security or have trouble finding a buyer when you want to sell - or both.
Less information: Foreign companies may not provide investors with the same level of information available to investors in U.S. public companies. Not only can information be harder to obtain but it might only be published in the country’s native language.
Legal remedies: If you have trouble with a foreign investment, you may not be able to sue the company in the U.S. And, even if you sue successfully in a U.S. court, collecting can be difficult.
Market operations: Foreign markets often operate differently from the major U.S. trading markets. Consider the rules for clearance and settlement of transactions.
Proceed with caution: If international investing appeals to you, rely on a financial professional advisor for guidance.
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