The Risks of International Investing by pfinancecr


The Risks of International Investing

As an investor, you may have heard exciting recommendations for investing
internationally. There is almost always an economy somewhere that’s doing well -
why not put your investing dollars there?

International investing is another way to diversify your portfolio. But what are the risks

You may have been hesitant to invest your money in foreign companies, simply
because you aren't sure of the drawbacks. Let's take a look at the risks, and you can
decide for yourself if it makes sense for you.

Transactional Costs

If you want to purchase a foreign stock, there can be significant transactional costs
beyond what you're used to paying. These can vary dramatically from country to
country. These extra fees can include exchange fees, taxes, levies, stamp duties and
“clearing fees.”

If you want to avoid these additional costs, you can frequently purchase American
Depository Receipts (ADRs), which trade in the US and have the same fee structure to
which you're accustomed. They're not available for all companies, but the larger
companies are well represented in the available ADRs.

Currency Risks

One thing that investors often overlook is the risk associated with currency
exchange. If you directly purchase a Japanese company, you're going to have to
exchange your dollars for yen. Even if the stock does well, consider what happens if

the value of the yen drops compared to the value of the US dollar.

You could actually lose money if you decide to cash out, even though the stock went
up. But consider that you could also make money, even if the stock goes down.

The value of the foreign currency relative to your base currency is always a variable that
you must consider. Of course, you always have the option of leaving your money in
the foreign market until the currency situation is more favorable.

There are many complex ways to hedge against currency issues by the use of futures,
options, and more, but those options come with their own costs and risks.

Liquidity Limitations

While many markets respond quickly to sell orders, like the US, many do not. It's not
always easy to unload your stock quickly when the time comes. While there are ways
to protect against currency-related risks, there is no good way for the average
investor to protect himself against the liquidity risks.

This is typically only an issue in emerging markets whose stock exchanges aren’t well
established. One way to guesstimate a stocks liquidity is to look at the spread
between the bid and the ask price. The greater the spread, the more likely that it will
be slow to sell when the time comes. Also consider the volume: lower volume stocks
are more difficult to sell.

Informational risks

The US has a lot of laws regarding the information that companies must provide to
investors. The information is usually quite reliable, as well. This is not always true in
other countries. You may not be able to get all the information that you're accustomed
to, and the information you do get might be suspect.

It's going to take more homework in many cases to have the same level of comfort
you have in the US.


                                   International investing can be a great way to both diversify your portfolio and take
                                   advantage of any hot economy. While there are only a few risks beyond what you're
                                   probably used to, it's important to know the risks and adjust your approach

                                   The 4 main risks are transactional, currency, liquidity, and informational. Mange
                                   these risks and you can invest anywhere in the world.


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Curtis Rose is an experienced professional with extensive experience in all
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