If you never look beyond your own nation’s economy, you could be missing out on some of the most lucrative investment opportunities on the planet.
Foreign economies offer access to emerging markets, industries that are thriving in other countries but not in your own, and the chance to diversify your investments on a scale that goes beyond what a domestic-only strategy can offer.
However, there are several concerns about overseas investment that stop some people from placing their funds in foreign markets.
Are these concerns justified? Some may be to an extent, but with some careful planning and the usual awareness of risk, the benefits of investing overseas can far outweigh the potential negatives.
Here are some of the most common concerns about overseas investment and whether or not you should worry about them too.
It’s excessively risky
All investing is risky to an extent and of course when you’re putting funds into an unfamiliar market or one that is still emerging and exhibiting high growth, there is some risk there too.
However, international investments can diversify your portfolio in a way that investing on a solely domestic scale cannot, helping to protect you against any drops in the UK economy.
Watch each market carefully before you commit funds to it, but you might find investing in several different economies can also help you to overcome localised seasonality so you don’t face any slow periods e.g. over Christmas or at the height of summer.
It’s too hard to do
There is no reason why investing internationally should be significantly difficult, and in fact there are funds with global exposure that you can easily buy into.
Some of those might be industry-based, e.g. petrochemical market trackers and other commodity funds, while others are geography-based such as emerging markets funds.
These kinds of funds allow you to spread your investment while keeping it within a defined area or sector – all while benefitting from the expertise of a fund manager when deciding what stocks and shares to buy or sell.
America is the strongest market
The US dollar is the reference currency for stocks and markets across the globe, but the USA is not necessarily the strongest overseas market to invest in.
Many factors can influence this, such as the dollar exchange rate (more on that in a moment), downturns in the US domestic economy, and pockets of strength elsewhere such as emerging markets that are performing particularly strongly.
Over time, no one economy is ever the outright strongest and some of the biggest gains can be made by sensing when sentiment is shifting in the markets so you can buy in at the beginning of a significant uptick.
Exchange rates diminish returns
Fluctuations in currency exchange rates inevitably increase volatility as they introduce an additional way for the value of your investments to change.
But you don’t have to view this as an unacceptable risk, when it can equally be an opportunity to increase your earnings.
In essence, investing overseas has two elements to it: the trade itself and a foreign exchange (forex) trade where you gamble on the future value of that nation’s currency.
When you buy stock overseas, remember this. Buying a lucrative opportunity at a time when that country’s currency is strengthening can compound the gains you make by a multiplying factor according to that increase in strength.
How to mitigate risks in overseas investment
Some of the main risks we’ve mentioned above include:
• Less familiarity with international markets.
• Much larger choice and variety of potential investments.
• Additional risk due to fluctuating exchange rates.
Mitigating against risks in international investment involves the usual due diligence: watch the markets carefully, choose your trades, diversify your investments and time your transactions to achieve the greatest added value and minimised losses.
Choosing a managed fund is a good way to benefit from the experience and expertise of a seasoned professional, who will hopefully be able to identify the best investment opportunities while also taking into account patterns in exchange rates.
Even when the strength of the destination currency is not in your favour, you can still profit so long as the gains made by your investments more than outweigh the exchange rate fluctuation.
With a much wider range of opportunities to choose from and access to the fastest growing economies – even when the UK is in the doldrums – investing on a global basis inevitably adds more weapons to your arsenal of ways to reduce risk, maximise gains and capitalise on positive volatility.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.