9 Things You Should Know About International Investing
For better or worse, today’s world is globalized. This means certain things such as US earnings reports, the Federal Interest Rate decisions, and political events are not the only items which can positively or negatively impact US markets. Geopolitical events can absolutely influence our markets at home.
So, what does this mean for the investor eyeing international markets? It means that in addition to analyzing your personal risk tolerance, there are certain risks and rewards you need to weigh before making a decision to invest internationally. Keep reading for a list of nine things you must consider before investing in international markets:
A million unexpected political or financial events can occur when you invest in foreign markets. It can be difficult enough to understand the complexities of US market moving factors such as currency values, political movements, or Fed “noise.” Integrating financial regulations and politics into your portfolio only makes it more challenging to understand in this aspect. At the same time, occasionally the risks you take can pay off. I’ll discuss a few strategies to ensure you are investing correctly in international markets next.
There are different Geopolitical risks in each different company you invest your money in. Because each country has a unique set of political rules in place, they experience unique tensions which can often impact their markets. If you do choose to invest in a certain foreign market, I highly recommend you do so through a mutual fund company with boots on the ground. Their analysts will have a well-developed understanding of exactly what is going on politically, financially, or otherwise that may disrupt investment performance.
Currency risk is a simple, but often neglected concept: when US currency gets stronger, it does not get stronger in a vacuum. Other currencies must get weaker in turn. Let’s you want to pull funds out of a foreign market investment when the US dollar is performing well, but the currency in a foreign market you’re invested in is weak. This means they will need to convert the money you’ve invested back into US dollars at a higher rate. You could be risking another portfolio hit in this case.
If you have ever invested in the stock market, you are familiar with a 1099. If you invest internationally, you will see a new section of a 1099 called a “Foreign Tax.” Each country may have a different tax for foreign investments. Depending on how the foreign market performed in a specific tax year, this may be a very high number. It is definitely an additional expense to consider when weighing your options.
Sometimes certain foreign markets move in completely opposite directions of each other, other times they move perfectly in sync. Let’s take a few Asian markets into consideration: regionally, China, Japan and South Korea may sometimes experience a political event which impacts each nation in a similar way. Other times, the impact of an event in one nation may only have a domestic impact and leave the others unaffected. Whatever nation you choose to invest in may have correlation to certain markets in surprising ways.
Some companies listed in a foreign country’s stock exchange do not have the same regulations as US companies do. If you wish to sell shares invested in a certain foreign company, you may not be able to immediately for one reason or another. As mentioned earlier, when you are able to sell keep the foreign taxes and currency risk in mind as well.
This follows the same trend mentioned in “Geopolitical Risks,” most investors simply do not have the time to understand international politics to the degree necessary for making international investments. Additionally, foreign companies are notorious for “cooking the books” or misusing accounting data. This can have a negative impact on your nest egg if you aren’t careful. When you make major money decisions, it always comes down to how much trust you have in a certain company.
Plain and simple, the regulations in other countries are not always the same as our own. This can be good or bad for a foreign company’s performance. For example, years ago China decided to increase their margin requirements overnight. This meant anyone doing any form of margin investing in China was instantly done. Different forms of international regulations can also have implications for tax codes, accounting, trade reporting, or any number of things related to your money.
The simple act of buying or selling shares in another country could have steep costs attached. You could pay significantly more to your Broker Dealer buying overseas due to the tax or trading costs factored in.
The Bottom Line:
International Investing is a whole new ball game. There are brand new risks and rewards to consider on top of your personal risk tolerance and other values. Some potential rewards are that valuations in foreign markets can be more attractive, foreign central banks are becoming more accommodating for US shareholders, and there are plenty of growth opportunities in emerging markets. You must ask always yourself if the risks are worth the rewards.
Are you ready to build a portfolio that meets your goal? Meet with Reno’s premier financial advisor, Jon Sanchez. Contact (775) 800-1801 or visit our Services page to learn how our team can serve you.
Jon Sanchez is a registered representative offering securities and advisory services through Independent Financial Group, LLC (IFG), a registered broker-dealer and investment advisor. Member FINRA/SIPC. OSJ Branch: 12671 High Bluff Drive Suite 200 San Diego, CA 92130. Sanchez Wealth Management, LLC and IFG are not affiliated entities. CA Insurance Lic. #0772626.