Keeping a portfolio with a healthy mix of assets that are properly diversified may allow you to weather market shocks more easily.
Investing Overseas? Consider the Pros, Cons
Some of the largest most recognizable brands in the United States are actually overseas companies. In fact, our count shows that currently 372 of Global Fortune 500 companies in 2015 are based outside of the U.S.
And as our economy has become more globalized, U.S. investors are increasing their international investing. According to Morningstar, $66.2 billion were poured into internationally focused mutual funds and exchange-traded funds (ETFs) in the first quarter of 2015, up from $37.9 billion in 2014.
Scottrade® clients have the opportunity to invest internationally through various products, including American depositary receipts (ADRs), which are securities representing international companies that trade on a U.S. exchange.
But before jumping into international investments, you must do your homework. Like any type of investing, global investing has its potential benefits as well as drawbacks.
“Global investing can provide you new opportunities, but it may also lead to increased risk,” said Joe Correnti, senior vice president of brokerage product at Scottrade. “People considering heading down this path need to carefully balance the benefits and the drawbacks of international investing and how it ties in with their overall portfolio strategy.”
Pro: Market opportunity
In particular, emerging markets (markets that haven’t been developed politically and economically) can be ripe for untapped opportunity for investment. For instance, these countries often have newer companies that have yet to be fully recognized by the market.
International investments can provide a counterbalance to the domestic holdings in your portfolio, which may help to lower risk.
Pro (and Con): Currency fluctuation
The value of a foreign currency in relation to the U.S. dollar plays an important role in determining whether your investment pays off. The more exposure a company (or a security) has to a foreign currency, the greater the impact of currency fluctuation. The more volatile the currency, the more volatile your portfolio could be.
Pro: More choices
International investing can greatly expand the menu of investing options. Want to invest in a Japanese automaker or German pharmaceutical company or a mutual fund focused on international companies paying dividends? Now you can.
Con: Political and economic risks
Although this isn’t true with all countries, some have more unstable economic and political situations than the United States. If you invest in opportunities in these countries, you may experience more volatility in your portfolio than you’re comfortable with.
Con: Not as diversified as you might think
Don’t assume that what’s happening in countries X, Y and Z won’t affect the domestic market. As our world becomes more interconnected, a political or economic event in one country can easily lead to a ripple effect across the global economy.
Con: Less regulated accounting
Not every country requires the same rigorous accounting standards that the United States does. If you choose to invest overseas, make yourself aware of the specific laws governing these institutions.
Con: Higher fees
The costs of international investing (management fees, custody fees, etc.) are often heftier with international investments. Although these fees may not be directly noticeable since they’re often in the form of management fees and currency fluctuations, they can still eat into your returns.
Some of the cons can be addressed by purchasing mutual funds and ETFs, which have professional managers who are tasked with understanding and managing through the geo-political, economic and financial hurdles of international investing.
“Investing internationally can be complex,” Correnti said. “If you’re not comfortable doing all of the research, you might be better off considering a professionally managed fund.”
Question: What role does international investing play in your portfolio?
International investing can involve substantial risks and is not suitable for all investors. Risks include changes in currency exchange rates; political, economic and social events; potential for illiquid markets; less information; reliance on foreign legal remedies; and different market structures and operations. Investors should fully research any security or strategy before making an investment decision.
Keep in mind that while diversification may help spread risk it does not assure a profit, or protect against loss, in a down market.
Investors should consider the investment objectives, charges, expense and unique risk profile of an exchange-traded fund (ETF) or mutual fund before investing. A prospectus contains this and other information and should be read carefully before investing. A prospectus is available through www.scottrade.com or through a Scottrade branch office.
More Articles & Insights
Before you can achieve success in your financial portfolio, you should consider setting clearly defined investing goals.
Scottrade Brokerage President Peter deSilva was drawn to the firm by its client-first approach. This approach was demonstrated with the company named “Highest in Investor Satisfaction with Self-Directed Services” by J.D. Power.