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.