Monday, December 30, 2019

The Good, The Bad And The Ugly Of Investing In Foreign Stocks

If you want your savings to make any kind of returns in the modern economy, you need to invest in stocks. If you put your money in a savings account, it'll lose value over time. Most interest rates offered by banks are lower than inflation. 

Buying domestic stocks (those that are listed in your home country) is an integral part of any portfolio, but if you want to diversify, you need to include foreign stocks too. 

The Good

The best thing about investing in foreign stocks is that they allow you to spread your risk. Even if a recession hits your home country, you can hope that companies based overseas continue to expand in their domestic markets, propping up the overall value of your portfolio. Often, you're able to increase your risk-adjusted return, just by including a more global sample of companies that aren't linked together so much by local economic conditions. 

The Bad
Investing in foreign stocks, however, is often problematic. If you live in a stable, wealthy place like the US, then it's unlikely that political crises will lead to cratering stock market values. The same is not valid overseas. Changing politics and new regimes can lead to vastly different economic outcomes. On the first sign of trouble, wealthy investors withdraw their funds from the country, looking for greener pastures. You could find yourself losing a heck of a lot of money. 

The Ugly
Perhaps the worst part of the process, however, is knowing when to buy. If you decide to buy foreign stocks, you must necessarily engage in forex trading. In other words, you need to convert your currency into a foreign currency that you can then use to buy the stocks that you want. 

Unfortunately, this adds a new layer of complexity to the process. Not only do you have to keep an eye on the value of stocks, but also on the value of your currency relative to that of the other country. The price of foreign shares could go up, but if your home currency appreciates, you won't make any return. 

So how do you invest in foreign stocks? It turns out that there is a vast array of ways in which you can do it. 

Exchange-Traded Funds
Passive investors love low-cost exchange-traded funds. Here you simply buy a single ETF linked to a broad portfolio of foreign stocks. The company that manages the ETF then rebalances the fund so that it accurately reflects the market. 

Global Mutual Funds
A second route is to use a global mutual fund. What's nice about these is that they do all of the legwork for you, providing you with global exposure to stocks across a range of currencies, but without you having to go to the hassle of managing a portfolio yourself. 

Global Deposit Receipts
Finally, you can use global deposit receipts. Typically these are denominated in US dollars and allow you to buy companies listed on foreign exchanges at their dollar value (instead of the domestic currency). 

Happy investing!







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