Experts recommend that investors possess a diverse portfolio of investments. Foreign investment should become a portion of every investor’s portfolio. Some investors recommend up to 50% of investments allocated to markets for optimized risk diversity and growth potential. The allocation of the investments depends upon how much liquidity is needed for the investor. Aggressive investors with a large amount of assets can invest in volatile, high risk securities. Moderate investors or lower net worth individuals would prefer more stable investments. That said, investors have several options in the foreign market.
1. Equity Mutual Funds
Investors seeking to gain experience in global markets should consider investing in foreign companies as a foreign investment. Foreign index funds will track the international market as a whole. This is a safe way to enter the foreign market.
2. Foreign Index Exchange Traded Funds (ETFs)
ETFs are diversified investments similar to mutual funds; however, the trade transaction is similar to a stock.
3. Invest in American Companies with Global Interests
This method of investing is a conservative way of investing internationally. Companies such as Coca Cola, Texas Instruments, Advanced Micro Devices, and many others have large scale international operations that are vital to their growth.
4. Global and International Real Estate Investment Trusts (REITs)
Experts recommend including a small percentage of investments in global REITs. The Schwab Center for Investment Research recommends allocating 3% to 5%. REITs typically return four times what an average United States stock returns. The current return on investment is approximately 23% annually.
4. American Depositary Receipts (ADRs)
American Depositary Receipts represent foreign companies that trade on United States stock exchanges.
5. Foreign Stocks that Trade in Domestic and Foreign Markets
Some investors select to trade foreign stocks in their own markets. Canadian stocks are popular with United States investors. Research must be performed with due diligence before investing in foreign stocks.
6. Money Market Funds or Foreign Currency CDs
There are several funds available for a $10,000 minimum deposit. This is a relatively conservative fund that will allow investors to invest in foreign entities while keeping their investments safe.
7. Foreign Bonds
Bonds are another way for foreign investors to diversify their portfolio. Individuals who purchase stocks hold a stake in the company. Bonds, however, behave like loans, where the investor is the creditor. The terms indicate that the debtor should repay the loan with interest to the creditor. The bonds are repaid over a fixed interval of time. Purchasing foreign bonds is akin to providing a low interest loan to a foreign company.
Considerations Before You Invest
Prior to developing your investment strategy, investors should consider the significant costs associated with foreign investments. Some of the fees include tariffs, markups and taxes. Your investments will also be affected by the currency conversions. Investors should be aware of the rules and regulations of foreign markets to avoid problems that may result from differences. The volatility of foreign markets is also greater because of terrorism, coups and political problems. Investors will be limited in the amount of information they receive regarding foreign investments, so there might be a limitation of predicting behavior of foreign markets.
