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Foreign Investments - more risk? bigger rewards?

In addition to all the risks you face in the US markets ( be they stock market, real estate or business), there are 2 additional risks associated with foreign investments:

Political risks
Local government might fall or it may confiscate your investment. Once you go outside of US, Canada, Australia, New Zealand, and the European Union - all bets are off. Just look at what happened to Lukoil in Russia. President Putin wanted to send a message to business interests that opposed him - and the message was loud and clear - if you doubt it, ask the owner of Lukoil who is doing time in Siberia on dubious charges. And a company friendly to Putin now controls Lukoil.

Currency exchange risk
If the dollar falls (as it has been recently ) - great, your international investment will make you additional money based on the changes in relative currency values. But if dollar gains relative to the currency of your chosen country - your returns will be lower. Right now ( Oct. 2007) it appears that dollar will keep falling forever, but since we are not subscribers to the doom-and-gloom theory - we believe that sooner or later, the dollar is likely to recover. It may take a few years - but in the meantime, there might be short term upward spikes - can you handle it emotionally?

Given the additional risks associated with international investing, many choose not to go that route. Others invest through US mutual funds and ETFs - safer, but it exposes their investments to the risk of US markets as well. If the US market is falling hard, international mutual funds and ETFs tend to fall as well, even though, in theory, they should be climbing. Click here for more about little mentioned ETF risks.


* You can buy index mutual funds that invest in foreign countries or regions ( Pacific region for example, or Pacific Region without Japan).
* You can buy international funds that are not index funds - they can purchase a wider range of stocks from a given country or region.
* You can buy international ETFs - ETFs are similar to mutual funds, but they trade like stocks - so if you think that Japanese economy is going to hell, and their stock market will follow - you can sell short EWJ and profit from its drop in price.
* You can buy individual stocks through American Depository Receipts - they trade on US stock exchanges just like ordinary US stocks. Unfortunately, stocks with ADRs are few and tend to be big - if your strategy is to buy small companies - don't bother looking for their ADRs - there aren't any.
* You could buy stocks directly in the country of interest - Charles Schwab and ETrade offer trading on a variety of foreign exchanges - but the commissions are UGLY.
* You could open a brokerage account in the country of your choice - do you know the language? - commissions are likely to be much higher than in the US.
* You could buy real estate in the country of your choice - all due diligence you would do in the US applies there as well - plus the political, economic, and currency exchange issues. To top it off - US banks will not lend money for foreign real estate ( at least not at the level of a few million dollars or less). Foreign banks tend not to offer fixed rate loans - are you ready for the loan payments doubling on your investment property? These are all questions you need to answer for yourself before signing on the dotted line.
And unlike with US investments - advisors are few and expensive.



If you still want to invest internationally, you can start by looking at offerings from Vanguard, Pro Funds, Rydex Funds and ETFs (use Yahoo site to research ETFs). You can find links to all these sites on our Useful Links page.

As for international real estate, businesses, diamond mines - sorry, you are on your own.

 

 


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