Global investing tends to be ignored or avoided, at the cost of better long-run returns.
The risks of foreign investing are many, but the rewards are significant, too.
The key is to go in with your eyes open and to diversify to manage international investing risks.
The rules concerning international investment opportunities are vastly different, prone to unexpected, sobering changes and international investing risks that do not align easily with traditional domestic investing practices.
International investing risks thus can be overwhelming for the unprepared and uninitiated. It doesn’t have to be.
It’s a very big world out there, one that gets incrementally smaller every second because of international business growth and maturity.
More than 75% of all global companies have headquarters located outside of the United States, according to research by Fidelity Investments.
That same data states that more than 46% of the market capitalization for all global business is represented by international investments.
According to an MSCI and International Monetary Fund survey, all non-U.S. based stock represents a 75% market share of global GDP.
The problem is that investors approach international investing in the same way they would investing domestically.
International business is rife with trade wars, currency fluctuations, Brexit, geopolitical tensions, supply chain disruptions, culture clashes, quarterly profit report variances, and tax exposure,.
Its important, then, to approach international investing with an international mindset.
It is also a mistake to believe that home-based stock investing always trumps international investing.
As per research by Fidelity Investments and Morningstar, U.S. stocks outpaced world stocks from 2010 to 2017.
Still, international stocks outpaced U.S. stocks from 2003 to 2009. Investing gains have years-long hills and valleys, domestically and internationally, so it pays to be in the know.
Making outsize assumptions and generalizations is the bane of all trade decisions.
It isn’t about how much you invest internationally either. Its how you invest and having the patience to wait for returns.
The four pitfalls to international investing include, but are not limited to:
- Not reducing risk via diversification
- The DIY investment approach (not consulting an advisor)
- Ignorance of geopolitical tensions
- Avoiding emerging and frontier markets
Let’s break them down one by one.
Not reducing risk via diversification
Fear of the unknowable is an overriding investment decision factor for many people. The fear of the unknown is what keeps investors from challenging themselves and investing internationally.
As with domestic investments, it doesn’t make any sense to make one outsized investment on one company, stock or product. After all, carrying all of your eggs in one basket vastly increases international investing risks.
If you are going to play the international markets, you must always diversify. Invest in a broad selection of opportunities.
For example, you could decide to invest in an international aviation company. In a world of Brexit and supply chain disruptions, that might be a bad bet if you haven’t done your homework.
You could take a chance with an emerging market investment instead. However, the emerging markets have been volatile lately.
It can be easy to experience some value loss, or a complete wipeout, if you go all in on just one international investment.
How much should you diversify? That all depends on your financial requirements, appetite for risk and how much of a long-term game you want play.
Depending on your financial circumstances, you could execute a domestic to international investment portfolio ratio of 60% vs. 40% or 70% vs. 30%, owning global stocks through a mutual fund, index fund or exchange-traded fund (ETF).
Doing this can help stabilize your risk-leveraged returns over the long-term. A well-diversified international portfolio lowers your overall volatility in an unpredictable world.
The DIY investment approach (not consulting an advisor)
Only about 42% of Americans currently own a passport. Less than half of all Americans travel outside of the country.
That statistic is a great argumentative parallel to American investors who fear international investing risks.
It is easy enough to say, “invest internationally.” However, where to start? Especially for the average domestically inclined investor who has probably never even traveled outside of the United States?
It would be great if you can do some traveling yourself, but you may not have the time. You should do some basic research on your own concerning your investing interests. That is a given.
Additionally, if you are not taking advice of an experienced professional advisor, then you are essentially, and irresponsibly, investing blind.
Consult the help a professional financial advisor, analyst or consultant. Especially one with some international investment expertise.
Consider communicating with financial advisors, expatriates or natives of the country you target, people who reside in the country where you are considering investments.
Take a consultation meeting with a lawyer experienced in international investing, business and tax law who can advise you on your cost exposure.
If your investment is too small to warrant the expense of advisor, you can also use a robo-advisor or an all-in-one global fund to diversify your international investments in a basic way.
ADRs, mutual funds and ETFs: For instance, you can invest internationally without personally trading via foreign exchanges, if you wish.
An American Depositary Receipt (ADR) is a negotiable security instrument that represents a pre-set amount of shares of an international corporation but traded on U.S. financial markets.
Numerous international stocks are listed in U.S. stock exchanges as ADRs.
You can invest and trade internationally via some ADRs on domestic soil in American dollars. Investing via an ADR thus helps you avoid transaction fees associated with foreign currency conversions.
International investing exposure can also be gained by investing in Security Exchange Commission registered exchange-traded funds, or ETFs, and mutual funds that track international stock markets.
You can avoid some potential financial risks, fees and costs inherent in international investment by choosing mutual funds and ETFs that are SEC registered.
Mutual funds and ETFs also represent multiple kinds of securities. In other words, by investing in mutual funds and ETFs that track international stock markets, you don’t have to fret over picking individual stocks to invest in.
Additionally, know what industries are represented in stock market indices that catch your interest.
The Swiss stock exchange features healthcare companies and products in over 30% of its listings. If you don’t know what is actually in the stock market of the country that you invest in, you may end up with mutual funds and ETFs dominating in industries you may not be interested in.
Fees and costs associated with international investment: Having a skilled and experienced advisor can also help you navigate the myriad and hidden costs associated with international investment.
Remember, there is a cost of doing business in all strata of industry. You shouldn’t become discouraged. It’s all about knowing what you are getting into.
Talk to an advisor, consultant, investor or lawyer about the potential fees and costs you stand to come across as an international investor.
Such costs run the gamut from transactions fees, currency conversion fees, commissions for your broker to manage your portfolio, foreign taxes on foreign investment dividends, and so on.
There is no one size fits all approach to investing, especially internationally. The international investing costs and fees that you may experience vary from country to country and region to region.
Whichever way you decide to do it, assembling your international investment portfolio isn’t easy. Do the work or hire someone to do it for you.
Investment market activity: The best place to start with international investing may be to look at all of the international stock markets indices and survey recent activity.
At least that way you can get a basic gauge of your potential investment options.
It pays to stay engaged with current financial events and maintain situational awareness. Check international market activity regularly, especially in reference to your potential investments.
Ignorance of geopolitical tensions
The impending execution of Brexit — the exit of Great Britain from the European Union — will severely disrupt business ties between the United Kingdom and the European Union, and by extension, the rest of the world.
Businesses associated with aviation will be affected by Brexit. Supply chain businesses, facilities and employees will be affected.
Some UK airlines are considering selling. “Brexit clause” airline tickets may become void after Brexit is initiated. After Brexit, many U.K.-based aviation businesses may not be able to fly to the EU.
What does that have to do with you? You could suffer financially if you invest in a UK or EU aviation or aviation associated company that is embroiled in Brexit.
The Trump administration’s recent global trade war machinations, too, have disrupted trade usually taken for granted.
China has instituted a 25% tariff on American soybeans and recently accounted for less than 17% of advance purchases. China bought more than 60% of advance soybeans orders from the United States over the last decade.
Due to this trade war, Latin America and the rest of the world stands to fill the global soybean gap created by the United States.
In fact, Brazil outpaced the United States as the global leader of soybean production in 2013.
What does this have to do with you? A lot if you have international investments ensnared in business deals that are intimately affected by the steadily simmering trade war.
Every country has its own government, laws and leaders. Geopolitical tensions, sanctions, tariffs, military conflicts, regime change, negotiations, and so on, affects international business in unpredictable ways over the short and long term.
The aforementioned examples are just a smattering of geopolitical events currently affecting the world.
You should know what is going on in the world, though it may be unreasonable to expect to know what is going on everywhere.
It is very reasonable to be up to date on what is happening in the country or global region in which you are investing. It would irresponsible not to be.
Any willful ignorance of the geopolitical turmoil occurring in the country of your potential investment will definitely cost you in the long run.
Having a spread of diversified international investments helps mitigate international investing risks, especially when unexpected geopolitical tensions arise.
Avoiding emerging and frontier markets
Developed markets are countries that feature sustainable industrial economies and working business infrastructures.
Emerging markets are countries that are not similarly developed but feature steadily improving economies and infrastructures, countries such as Brazil, India, and Russia.
Frontier markets are developing countries that are rapidly developing economically and whose trading markets are attempting to become globally viable.
Such frontier market countries usually have a signature product, asset or resource that is extremely valuable to developed and emerging market countries. Argentina, Croatia, Kenya, Kuwait, and Nigeria are just a few examples of frontier market countries.
There are risks involved in dealing with emerging and frontier markets of course. Corruption, arbitrary rules imposed by leaders, international fees and political instability are just a few.
Many investors won’t invest in emerging or frontier markets because they know nothing about the countries in questions. Or they know too much about them.
Over 58% of the world’s supplies of cobalt comes from the Democratic Republic of Congo, for instance, a country rife with political and social instability.
However, every lithium ion battery on the planet, batteries that power laptop computers and the future of electric vehicles, require cobalt as a main component.
Meanwhile, many U.S. investors are hampered when it comes to investing in Russia, an emerging market, because of U.S.-imposed sanctions.
The truth is that while many emerging and frontier market countries may have stability problems, they also stand to become the developed countries of the future.
Numerous emerging and frontier markets products, assets and resources are required by the developed market nations of today.
Make your choices wisely. Commit to deep-dive research. Consult expert advisors.
If you discount emerging and frontier market investments, you may be counting yourself out from potentially serious profits.
Playing the long game
Investing internationally will only be as difficult as you make it. Take the fear of the unknown out of the equation. Always act from a position of research and knowledge.
Diversify your interests. That is a given in an unpredictable world. Employ the counsel of an advisor, consultant, investor or lawyer.
Don’t try to invest internationally on your own. Be aware of geopolitical turmoil. Don’t discount emerging and frontier markets.
Also, remember that international investment opportunities, as with domestic, are a long-term strategic plan to maximize return.
Be patient, informed and always have situational awareness of market condition.
When you invest internationally, you are exposed to a whole world of potential international investing risks, but also enormous opportunities at a relatively affordable cost.