Investing in Foreign Markets
Diversification is a word that investors hear every day in the markets. It’s an important concept – “don’t put all your eggs in one basket.” To most, it simply means choosing a mixture of stocks and bonds and ensuring that the stocks you hold are from various sectors of the economy and come in varying sizes from large cap to small cap. But these changes are only superficial, there’s still one more layer that tends to be overlooked – investing overseas.
Domestic market risk is what happens when a portfolio consists only of US-stocks. That means any event specific to US markets like an unexpected drop in GDP or political event will impact US stocks far more than those situated outside of the US. For investors to be diversified against regional-specific risks, there needs to be an inclusion of international holdings.
Ways to invest internationally
Picking an international investment can be a daunting task. It’s hard to perform due diligence on a company you have never heard of with limited information to go on. Unless you have unique knowledge of foreign companies, investing overseas is considered riskier than investing domestically.
But that doesn’t mean there aren’t ways to invest. Investors have several methods to choose from to gain international exposure.
Mutual funds are one of the best ways to gain international exposure. That puts the responsibility of research and balancing of international stocks solely on the shoulders of the fund managers who have in-depth knowledge about ex-US investments.
Another great way to get access to overseas stocks is through ETFs. These funds trade like stocks making liquidity a non-issue and give investors the ability to choose a basket of international holdings instead of having to narrow it down to just one company. Investors can even choose regional specific ETFs or take a broader approach by investing in several countries at once.
Finally, you can invest directly in international stocks via ADRs. Short for American Depositary Receipt, ADR’s allow foreign companies to list their stock on US exchanges. Companies listed as ADR’s have to meet certain listing requirements set forth by the SEC making them safer for investors rather than attempting to invest directly in an overseas company listed on their exchange.
Not all investors believe international investments are necessary. Legendary investor John Bogle, the founder of Vanguard Group, thinks that there’s no reason for investors to chase returns overseas – there should be plenty of opportunities for profit in the US alone.
However, diversification by including ex-US stocks isn’t something to dismiss out of hand. It can effectively hedge your portfolio against certain risks while boosting returns in high growth countries. By utilizing mutual funds, ETFs and ADRs, investors have a plethora of options to pick from.