Investing in stocks from another country can diversify your portfolio and increase returns, yet requires more research and knowledge about foreign markets and politics than what a casual investor has time for.
Foreign investments can also be subject to currency fluctuations that could alter your return, as well as different tax structures than those found in the United States.
Investing in Large Public Companies
As they transition into international investing, investors may choose large-cap stocks with operations in multiple countries as their starting point. These leading industries tend to be less risky than smaller firms and offer great dividend payments as well as return on investments.
International investments can add an international flavor to your portfolio while simultaneously increasing returns. You can do this either through directly investing in foreign companies or exchange-traded funds (ETFs) that track them.
ETFs and mutual funds that invest in international markets offer greater diversification than holding individual country-specific holdings, helping reduce the chances that instability in one nation could damage your entire portfolio. But these funds come with their own risks – including currency risk and being subject to changing economic, political, or other influences; such risks are particularly prevalent in emerging markets.
Adding Foreign Investments to Your Portfolio
Foreign stocks offer one of the best ways to diversify your portfolio, giving you access to growth in other global economies while mitigating risk from economic bubbles or downturns in the United States. And you do not have to travel to another country to take advantage.
Financial advisors typically recommend allocating between 5% to 10% and 25% of one’s portfolio to foreign stocks for conservative investors and up to 25% for aggressive ones. But investing in foreign stocks does not come without risk: country/regional risk refers to events taking place outside the U.S. that may negatively impact securities issued from companies located there; currency risk occurs if an investment’s value in terms of U.S. dollars falls due to fluctuating exchange rates;
Another way of diversifying into international markets is through buying shares of multinational corporations (MNCs), which have their headquarters in the United States but operate globally. You should keep in mind, however, that MNCs represent only a small part of global equity market and should not form the backbone of your portfolio.
Most investors purchase stocks from other countries to diversify their portfolio and take advantage of growth opportunities in different parts of the globe. But investing in international stocks also presents its own set of unique challenges and risks. Country/regional risk, the possibility that political unrest or financial difficulties in a foreign country could cause companies in that nation to decrease; currency risk, the chance that as local currencies depreciate against the U.S. dollar, their stock price in that foreign country might decrease; dividend tax is another consideration, imposing a 30% withholding fee on dividend payments from companies to non-U.S. shareholders (though some opt not to distribute dividends altogether and invest profits back into their business instead).
Investors should keep these issues in mind when making international investment decisions, and be mindful that investing in foreign stocks may require more research than domestic ones as markets in other nations often operate differently from those found within the US.