Pro tips on profiting with non-US investments
Let's start with this tip: I suggest that most investors look to mutual funds when investing abroad. This is because there are a variety of different mutual funds that encompass basically everything most investors should need. There are funds that specialize in stocks, those that specialize in bonds, one for bonds and stocks, and still others for money market funds.
Among these mutual funds there are geographic breakdowns for what different companies will handle and control.
Global Funds. There are global funds that look for smart investment opportunities worldwide but often end up putting a good deal of their investments in the US market. International funds, of course, only invest in foreign markets.
Emerging market funds. Emerging markets, like Latin America and Eastern Europe can offer a promising returns but are volatile.
Regional funds. Regional funds target specific areas such as Asia or the European peninsula.
Lastly, there are country funds, which do exactly what they sound like, focus on specific countries for investment.
Just like domestic markets, foreign investments are at risk when market values decline, interest rates change or a creditor defaults. However there are also some other risks one must consider investing with this strategy.
Currency risk. There is often currency risk--this is when the value of the dollar changes in comparison to the foreign currency and can effectively erase all of your gains. A few mutual funds will try to protect against this by neutralizing any loss due to currency exchange risk but that also means they may call it wrong.
Political, social, and economic risk. The political, social and economic risks in foreign countries are also a concern because foreign governments have been known to impose high taxes on international withdrawals and seize corporations for governmental property. Also most foreign countries don’t have the same regulations that the US does regarding transparency so, obtaining pertinent information can often be difficult.
Despite the risks adding international investments to your portfolio can help to greatly increase your diversification and potentially your gain while only adding incremental risk. Of course, read all of the materials carefully and only invest if you know what you are getting yourself into.
Cha-Ching …and that’s all for now. Courtesy of Andrew Horowitz, guest host of Money Girl’s Tips for a Richer Life. Thanks for tuning in to “Money Girl”. This is Andrew Horowitz sitting in for The Money Girl. Listen to my weekly podcast…The Disciplined Investor also available on iTunes.
And, for sending in a question that helped with today's episode, Kimberly is going to get a copy of An American Hedge Fund: How I Made $2 million as a Stock Operator by my friend Timothy Sykes. Thanks again Kimberly...
As always, everyone’s situation is different, so be sure to consult a tax or financial advisor before making important financial decisions. This podcast is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice.
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Morningstar's International Investing
SEC - International Investing
MSN - World Market Update