Investors prefer to invest in what they think they know. That’s why they invest the most of their portfolios in U.S. stocks.
There’s nothing wrong with investing in what you know. The problem is most of the goods and services you use have some international input. And because there are so many more opportunities overseas, you waste opportunity to reduce risk and increase return by ignoring them. Investors don’t know how much they are missing when about three-fourths of the global economy is outside of the U.S.!
Let’s take a look at 3 ways to invest with a global viewpoint, namely through foreign stocks, international EFTs and American multinational businesses. It’s also important to review some of the risks involved in global investing and why it’s so important to work with a financial advisor who has the right expertise and a global view.
If you have serious money you want to protect, you need the best financial advice possible. Contact Global View to see if we’re the right fit.
Directly Buying Foreign Stocks
Buying foreign stocks is the most direct way to invest internationally. It’s easy to buy the shares of the larger foreign companies. These are listed on major U.S. exchanges such as the Nasdaq and the New York Stock Exchange. They trade as American Depositary Receipts (ADRs). ADRs are negotiable certificates representing a set number of foreign company’s stock shares. ADRs are dollar-denominated and provide a convenient, liquid method for U.S. investors to buy foreign stock. You don’t have to worry about exchange rates or foreign settlement.
The problem is most foreign stocks are not listed on U.S. exchanges. They are only available on foreign stock exchange. To buy those stocks, you need to have access to the exchange where the company is domiciled. To do this truly globally, you would need access to 22 international exchanges. In other words, there is really no way to do that without working with someone who knows how. Which is why it’s so important to work with an advisor who has relationships with the best fund managers.
Investing Through International ETFs
Exchange-Traded Funds (ETFs) trade like stocks. They represent a basket of securities, often tied to a major index. ETFs trade on U.S. exchanges just like normal company shares. Because they represent a basket of stocks, they offer instant diversification. International ETFs are an easy way to invest globally. International ETFs can focus on particular regions, countries or sectors. For example, ETFs can focus on international emerging markets or international developed markets.
Because ETFs are listed on U.S. exchanges, they are liquid and easy to trade. ETFs based on international stock indexes have stable portfolios, which helps keep management fees low. However, the fees for international ETFs can be higher than domestic ETF fees, so it pays to research costs before committing to an international ETF.
Most international ETFs are indexes of foreign securities. There are also many international mutual funds that attempt to replicate indexes. Both investment vehicles may be fraught with other risks including political and currency risk. Your financial advisor can help you with that.
Purchasing Shares of Multinational Companies
We live in a global economy. Multinational corporations access global markets. They have higher growth than companies focusing on mature U.S. markets (or for that matter, solely European markets, for example). Some companies are almost exclusively international-facing. For example, Philip Morris International sells tobacco products only outside the United States. More frequently, multinationals have a market presence in the U.S. and abroad. Boeing and Proctor and Gamble are U.S. domiciled multinationals. Similarly, Airbus and Neste are European domiciled multinationals. By investing in these companies, you gain exposure to foreign markets without buying foreign shares.
Advantages of Global Investing
Investors benefit by including foreign securities, for these reasons:
- Diversification: Different countries and regions can have different growth rates. Investing globally gives you the opportunity to offset losses in one region with gains in another. Diversification can increase returns for the same amount of risk. It can also decrease risk while maintaining the same returns. The easiest way to gain foreign diversification is through an international fund (ETF or mutual fund), where each share represents a whole basket of global stocks. Some index ETFs accommodate those who want broad foreign exposure. For example, the MSCI World Index tracks large-cap and mid-cap stocks in about two dozen developed countries.
- Faster growth: At any given time, some countries and regions are growing faster than others. With proper research and advice, you can work out a strategy that allows you to take advantage of hot regions or sectors. This is where liquidity pays off, since it can be hard to buy shares not represented on American exchanges.
- Currency movements: You can get a double win by purchasing appreciating shares denominated in strengthening currencies. Of course, this requires additional expertise, so it’s wise to work with a knowledgeable advisor. You can also mitigate currency risk if you wish through hedging techniques that either you or the investment vehicle employ.
- Thinking beyond stocks: Major macroeconomic trends can favor different types of investments at different times. That’s a good reason to consider international fixed income securities, including foreign government bonds. This type of diversification can reduce your risk when the world enters recession.
Risks of Global Investing
Emotional investing is dangerous! If you’re a DIY-er when it comes to investing, make sure you don’t make decisions without understanding the risks. And because international stocks are often more volatile than U.S. stocks, this danger is magnified.
Some risks to consider when you invest globally are:
- Taxes: Foreign countries may withhold taxes on foreign investors.
- Liquidity: Shares of companies in emerging markets may be less liquid. You’ll see this in higher trading costs and larger bid-ask spreads.
- Political risks: Political events can negatively impact a country or region.
- Currency risk: The value of your investment could suffer from a weakening foreign currency. You can hedge away those risks, but that raises the cost of foreign investments.
- Unfamiliarity: Foreign companies may be subject to local risks that are unfamiliar to you.
It’s easier to understand how to invest globally than it is to choose which global stocks to own. You can buy ETFs and ADRs with relative ease. The trick is to know which ones to buy and which ones to avoid. A financial advisor can make a critical difference between success and failure when investing overseas. With the right knowledge and risk control measures, international investing can add a significant kick to your long-term returns.