There’s nothing wrong with investing in U.S. markets. But looking at foreign markets might open some doors and provide you with some new, lucrative opportunities that you didn’t have access to before. U.S. securities only represent a small portion of the global market. Investing in international markets does come with certain risks, but if you approach it strategically, it just might pay off.
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Why You Should Consider Investing Abroad
Smart investors understand that it’s important to have a diverse portfolio. Investing internationally can give you the chance to diversify your assets, and in the end it could help you build long-term wealth. Strong markets like those in the U.S. occasionally run into trouble, so having foreign investments could prevent you from losing too much money during a bear market or a market downturn.
Investing abroad can also give you the chance to put your money into emerging markets in countries that aren’t as developed as the U.S. Stocks in these markets are quite inexpensive and although they haven’t performed well in years, things could turn around in the future.
Why Investing in Foreign Markets Is Risky
Before you invest in an international market, it’s important to think about the risks that go along with doing so. For example, exchange rates could be an issue. If your stock in India is performing well but the rupee’s value is falling in relationship to the dollar, you might not see the kind of return on investment that you’re expecting.
There are also risks related to political and social instability. If you’ve invested in a market in a country that’s facing a war, for example, your investments could underperform.
Finally, different markets and countries have different tax codes. Investing in foreign markets could complicate your tax situation. Even if you’ve made a lot of money in FOREX trading, you could lose a portion of your wealth if you end up with a high tax bill.
Related Article: What Is FOREX Trading?
How to Start Investing in Foreign Markets
Investing abroad can be tricky since different countries have different rules and regulations. Before you purchase any kind of security, it’s important to do your research so that you know as much as possible about the markets that you’ll be tapping into.
Reading SEC reports, financial publications and international business news could be a good idea if you don’t know how to get started. Below are several types of assets that you could consider investing in:
1. Mutual Funds
When you invest in mutual funds, you put a fund manager in charge of managing your investment accounts. In an international market, a fund manager will understand the ins and outs of investing in that environment and will be able to handle currency conversions and other matters for you. While mutual funds tend to come with high management costs and fees, you will end up with a diverse group of funds.
2. American Depository Receipts
In most cases, foreign stocks within U.S. markets trade as American Depository Receipts (ADRs). Buying one ADR is the equivalent of buying a single share (or a part of a share). Just keep in mind that you’ll likely have to pay additional fees since you’ll have to convert your foreign currency into U.S. dollars.
As an alternative, you can look into U.S. traded foreign stocks. That way, you can invest in U.S. securities that trade in the same manner as their foreign counterparts.
3. Exchange-Traded Funds (ETFs)
ETFs can track indexes, commodities or bonds. Unlike mutual funds, they are listed on stock exchanges and are traded like stocks throughout the trading day. By investing in an ETF that tracks an international index, you can easily enter a foreign market.
4. Direct Investments in Foreign Markets
You also have the option of investing directly in a foreign market. If you’re interested in that, you may need to ask your brokerage firm to put you in touch with a foreign brokerage company that can help you set up your investment account.
Related Article: ETFs vs. Mutual Funds When You’re Investing on a Budget
International investing can help you inject some diversity into your portfolio and reduce your overall investment risk. But keep in mind that different people have to make different decisions. Before you tap into an international market, it’s best to make sure that’s something you’d be comfortable doing.
If you decide that you’re ready to jump into foreign trading, you might need to consult a financial advisor who can guide you through the entire process.
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