Today's economy offers so many new options for planning our financial future. One option is international investing in the ever shrinking global marketplace. There are numerous pros and cons to investing oversea; however, once you have grasped the major principles, there is not such a great deal of difference between investing at home and investing internationally.
1. Pro – Currency – The effect of the global economy on currency exchange rates play a big role in investments. It provides a new layer of diversification for any portfolio and can significantly increase your rate of return. This works best for investors with long term goals
2. Con – Stock in Companies operating overseas – There are several risks involved with investing in companies based in your home country that have operations overseas. These are translation risk, transaction risk and economic risk. All are related to the effects of converting foreign currency back into home currency and the time differences that occur between entering contracts and settling contracts.
3. Pro – Higher Rate of Return – Often the return on investment from foreign investments are higher than comparable home investments. Newly developed multinational companies are growing rapidly and providing excellent sources of investing success.
4. Con – Higher Risk – The regulations imposed on those companies may be vastly different from the regulations we are used to in the United States. The foreign government may be new, or recently reestablished creating an uncertain or unstable environment. You cannot make conclusions on the valuation levels in other countries without fully understanding the differences between their accounting standards and United States Accounting Standards.
5. Pro – Foreign Exchange Controls – Then change in foreign exchange controls are making it easier and more accessible for investors to diversify internationally.
6. Con – Fees – The expenses associated with investing, such as transaction fees, management fees and custody fees, are often higher when dealing with international investments.
7. Pro – Emerging Markets – Many foreign markets that are considered “developing” have attractive companies that have yet to be fully valued by the market. These create profitable investment opportunities
8. Con – Less Liquid – International investing is quite often less liquid than domestic investing. If there is a chance you may need to retrieve a portion of your funds for emergency needs then international investing may not be for you.
9. Pro – Outperforming US equities – As of the end of 2007, based on a 10 year period, the cumulative return for international stocks was almost double the return for domestic stocks
10. Con – Long term – International investing is for the long term investor. It often relies on emerging markets, developing countries, and higher risk that can appear volatile on a short term basis but will bring great profits in the future.
Our world is shrinking. Many of our familiar products are from foreign corporations such as Bayer, Toyota, Nokia, Adidas and more. Investing in them would be investing in products you already use and love. Be prepared to invest for the long term, do your homework and research your investment firm. International investing may be the diversification your portfolio needs.
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The Pros and Cons of International Investing
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