Dipping Your Toe in International Waters

At times, international markets can offer higher potential returns, but it’s important to remember that more return potential means more risk potential. That said, there are ways to manage that risk.

Let’s begin by reviewing why international investing can be riskier than domestic investing.

First, economic instability, often caused by abrupt changes in interest rates, inflationary pressures, trade agreements and gross domestic product, can affect the profitability of an investment. And different governments may have varying regulations regarding industries or even individual companies.

Second, with some foreign markets, particularly small ones, trade limitations, different accounting standards and obsolete technology can, at times, make it difficult to trade certain securities; this illiquidity can make it hard to buy and sell at a good price.

Third, the value of foreign currency fluctuates with changes in the supply of and demand for both the foreign currency and the U.S. dollar. This can affect the value of your investment.

Although the risks involved with foreign investments cannot be completely eliminated, there are ways to manage those risks.

One way: have a long-term horizon. Overseas companies need time to adjust to the profound changes in international political and economic conditions, the pace of technological development and global competition. Because short-term fluctuations are typical, it’s important to maintain a long-term perspective.

You can also consider investing via mutual funds. Most individual investors don’t have the experience, expertise or financial ability to create international portfolios of the scope and quality offered by professional investment managers. In addition to providing professional management, mutual funds can also provide diversification by investing in a portfolio diversified by region, country and industry.

If you need help determining if international investments meet your needs and risk tolerance, we can provide additional input and help you choose the right investments to balance growth potential and risk. We’re just a call or email away.

What Rising Interest Rates Could Mean for Your Investments

The U.S. economy shifted into higher gear over the summer, and an improving economy generally means higher interest rates, which can affect your investments in numerous ways, good and bad.

Why are people worried about a rate hike? A growing economy can lead to inflation, and to keep it in check, the Federal Reserve (Fed) raises interest rates. A change in the federal funds rate has a ripple effect on other interest rates. People then borrow and spend less, the economy slows and inflation isn’t a problem.

So how are different investments affected?

The yields on money market funds tend to rise with the federal funds rate. This means money market funds may be a good short-term investment option when rate hikes are on the horizon. Bond prices, on the other hand, tend to move inversely to interest rates, so bond prices generally fall with rate hikes.

Stock performance can be mixed when rates are hiked. If an interest rate rise is on the horizon, it’s because the economy is doing well and central bankers at the Fed don’t want it to overheat; that means businesses are probably performing well. But when investors think the Fed is going to raise interest rates (and restrain the economy), stock prices often fall.

Now that the economy is improving, investors are worried about whether it’s time for a rate hike, so please call or email us if you want to better understand how to protect yourself from this eventuality. We’re here for you.