Individual investors have access to a wide variety of investments in and outside of the US, which include international and domestic assets. Global investing involves investing in securities that originate all around the world.
According to Charles Schwab , global allocation provides diversification benefits and is the pillar of wealth management. It can also help investors position your portfolio for long-term growth.
Increased geographic diversification may also offer some downside risk mitigation, as the relative performance of US vs. international stocks has historically alternated, according to Morgan Stanley.
Essentially, the US markets may have a different rhythm than international markets. Therefore, investing in both has the potential to give investors the best of both worlds if one rises while the other falls, helping minimize return losses.
Investing in Global Investments
There are several ways investors can get started in the global market. But before an investment decision is made, it’s important to learn as much as possible about each investment option and understand the risks involved.
A mutual fund is a type of security that pools money collected from investors and invests in different assets such as stocks and bonds. The portfolio of a mutual fund is made up of the combination of holdings selected. US-registered mutual funds may invest in international securities. These types of mutual funds include:
• Global funds that invest primarily in non-US companies, but can invest in domestic companies as well.
• International funds that invest in non-US companies.
• Regional or country funds that primarily invest in a specific country or region.
• International index funds designed to track the returns of an international index or another foreign market.
US-registered mutual funds are composed of a variety of different international investments. As with any mutual fund, when an investor purchases a US-registered mutual fund, they’re buying a fraction of all of the securities, which increases diversification.
For investors to create this level of diversification on their own with individual stocks and bonds would be difficult, expensive, and time-consuming. Therefore, buying shares of US-registered mutual funds may give investors access to more diversification.
Exchange-Traded Funds (ETFs)
An ETF is an investment fund that pools different types of assets such as stocks and bonds and divides ownership into shares. Most ETFs track a particular index that measures some segment of the market.
This is important to understand—the ETF is simply the suitcase that packs investments together. When investing in an ETF, investors are exposed to the underlying investment.
ETFs that are US registered include foreign markets in their tracking but trade on US stock exchanges These types of investments may offer similar benefits as US-registered mutual funds.
While many non-US companies use ADRs to trade their stock, other non-US companies may list stock directly on a US market, known as US Trade foreign stocks. For example, Candian stocks are listed on Canadian markets and are also listed on US markets instead of using ADRs.
💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.
Why Invest in Global Markets?
While some of these investments may seem confusing, there are a few reasons why investors might choose global investments.
Again, choosing global investments can diversify an investor’s portfolio. It may be tempting for an investor to concentrate money in a few familiar sectors or in companies for which there is a personal affinity. But putting all their eggs in one basket could potentially lead to vulnerability.
There is no guarantee against the possibility of loss completely—after all, risk is inherent in investing. But spreading assets to international and domestic equities may reduce an investor’s vulnerability because their money is distributed across areas that aren’t likely to react in the same way to the same occurrence.
Another reason investors might choose to invest globally is because of the growth potential. The US is considered a mature market and may not have as much growth potential as other economies. Choosing global investments allows investors to potentially capitalize on profits from growing economies, particularly in emerging markets.
If you choose not to invest outside of the US, you are narrowing your investment opportunity set. Even though investment information may be more challenging to obtain and analyze, there is the potential for a great deal of growth.
The Risks of Global Investments
As with any financial decision, careful consideration is required when selecting an investment. But, there are a few unique global investment risks and issues that need to be accounted for before investing in any global investment.
Currency and Liquidity Risk
Currency risk is also known as exchange-rate risk. It stems from the price differences when comparing one currency to another. When the exchange rate between the US dollar and a foreign currency fluctuates, the return on that foreign investment may fluctuate as well. It’s possible that a non-US investment might increase its value in its home market but may decrease in value in the US because of exchange rates.
In addition to the risk of exchange rates, some countries may restrict or limit the movement of money out of certain foreign investments. Conversely, some countries may limit the amount or type of international investment an investor can purchase. This could prevent investors from buying and selling these assets as desired.
Countries in the midst of transition, war, or economic uncertainty may also be experiencing adverse economic effects, and companies within those countries may be impacted. These days, news can change by the minute, and it might be difficult to keep on top of what’s happening when so much news is happening all at once.
Sometimes it can be more expensive to invest in non-US investments than investing domestically. This is due to possible foreign taxes on dividends earned outside the US, as well as transaction costs, brokers’ commissions, and currency conversions.
Limited Access to Information
Different countries may have various jurisdictions that require foreign businesses to provide different information than the information required of US companies. Also, the frequency of disclosures required, standards, and the nature of the information may vary from what you would see in the US.
For example, the Securities and Exchange Commission or SEC is responsible for protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation in the US. The SEC does this by requiring public companies to disclose “meaningful financial and other information to the public.” This allows investors to make informed investment decisions about particular securities.
Whereas in other countries they may have different organizations and guidelines for monitoring and regulating capital markets.
Additionally, analyzing individual investments is challenging enough with all the information available. But when investing internationally, the analysis adds another layer of complexity, since investors need to figure out different issues such as account, language, customs, and currency.
💡 Quick Tip: How to manage potential risk factors in a self directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.
Consider Investment Risk When Building Your Portfolio
Risks are a part of life. It’s difficult to grow, change, or improve without taking chances. What’s safe isn’t always what’s best, so getting the best of something typically involves some risk.
When creating an investment portfolio, determining risk tolerance, which ranges from conservative investments (low risk) to aggressive investments (high risk), is a typical first place to begin.
Higher-risk investments may have the potential for higher returns, but they also have greater potential for losses. Therefore, by assessing your risk tolerance, you won’t take risks that you can’t afford to take.
Just like in life, there are no guarantees when taking an investment risk, but considering informed risks—based on research and experience—may put financial goals within reach.
Becoming a Global Investor
Even though the world’s political, economic, and sociological landscape is ever changing, considering investments in global markets may help minimize risk exposure.
To become an international investor, a good place to start might be by adding certain mutual funds and ETFs to an investment portfolio. Newer investors might be more comfortable starting with US stocks.
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Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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