Even though foreign investment can be tricky sometimes, mostly because of language barriers and currency conversions, it is still recommended by many financial advisors. A diversified portfolio should be a long-term goal for almost every investor. There are multiple ways of investing in the international market without exchanging currencies. Emerging economies and high growths of some countries in the world are always good reasons to invest in some of them. However, you have to know how to get started and when to make the investments. In this article, we will show you five tips for investing in the international market.
Investing has its ups and downs
The most significant reason to invest in foreign stocks is to diversify your portfolio. Also, you will take a stake in the growth of other economies, not only of your own country. Therefore, many financial experts suggest foreign stocks as a great addition to an investor’s portfolio. For conservative investors, the recommended allocation is five to ten percent. For more aggressive investors, the maximum should be around 25%. However, there is always a risk when it comes to investing in foreign stocks – changes in market value, political situation, risk of fraud, etc. However, with the help of the right advisors, you will be able to make the right decisions, which will lower the chance of any of those risks.
ETFs and mutual funds
Exchange-traded funds (ETFs) and mutual funds are the most common and easiest way to invest in the foreign market. When investors have foreign holdings in multiple countries and industries, these two types of fund will provide them with a well-diversified and quick foreign component in their portfolio. There are also many different types of funds investors can choose from – international, regional, country, sector, etc. How to know which of these is the best for you? It only depends on your investment objectives and willingness to risk. Also, mutual funds are usually managed by professionals, while foreign ETFs are better to gain diversification easily.
Even if it might seem that adding foreign fund to your portfolio will cause a boom effect, don’t get excited too early. International markets can always cool off, and that is always a risk. Hence, don’t be overly optimistic – your expectations about foreign corporate earnings should always be realistic and according to current facts. However, adding international exposure is excellent despite the potential for higher volatility in foreign stocks. Why is that so? Because adding foreign stocks to your current portfolio can reduce its overall volatility. For instance, European stocks are 10% more volatile than the S&P 500, but even then, the European market can help offset gyrations in U.S. equities.
Index investing and its advantages are well-known to investors. Especially lower fees and hitting benchmarks. However, picking the right foreign ETFs or index funds requires other considerations as well. For foreign ETFs, that offer clearer plays on other economies, consider having one that owns midcap and small-cap stocks. For international exposure, many advisors prefer active managers because of hidden growth opportunities which lie abroad. However, it is sporadic to see lasting, consistent outperformance by active funds. They charge expense ratios of more than 1% assets annually, and also, ten times the expense ratios of some ETFs.
Some investors are not comfortable with buying foreign stocks, which is understandable. In that case, they can find domestic companies that have the majority of their revenue and sales abroad in different countries/continents. Multinational companies are the best for this purpose. For instance, if you are a U.S. investor, you can consider having shares in Coca-Cola or McDonald’s Corporation. These companies generate the massive majority of their revenue from their global business and operations. Even though you won’t have true foreign diversification, you will still have a stake in international growth. The most significant advantage of this method is lower risk, which is, for some investors, an essential factor.
Before investing, you will have to fully understand the political and economic conditions in the country you want to invest in, as well as other factors that could influence your investment. Focus on your objectives and goals, costs and potential returns and the balance between those factors and always keep all possible risks in mind.