International Investing: Smart Move Or Risky Bet?

International investing is a viable option for investors looking to diversify their portfolios and access growth opportunities in foreign markets. By investing in international stocks and bonds, investors can reduce their portfolio's volatility and benefit from exposure to a wider range of economic and market forces. However, it's important to consider the risks associated with international investing, such as currency fluctuations, political and economic instability, and lower liquidity in foreign markets.

International investing can be more expensive than investing in US companies

• Broker fees: Working with a broker or investment adviser can be costly, and it is important to ensure that they are registered with the SEC or the appropriate state regulatory entity.
• Currency exchange rates: Changes in currency exchange rates can increase or reduce investment returns. Additionally, some countries may impose foreign currency controls that restrict or delay investors from moving currency out of the country.
• Transaction costs: Investing in international markets may involve higher transaction costs, such as commissions and other fees.
• Information access: Many companies outside the US do not provide investors with the same type of information as US public companies, and the information may not be available in English. This can make it difficult for investors to make informed decisions.
• Legal remedies: If US investors have a problem with their international investment, they may not have access to the same legal remedies as they would when investing in US companies. They may need to rely on the legal system in the company's home country, which may not offer the same protections.

While international investing can be more expensive, it is important to consider the potential benefits as well, such as diversification and access to emerging markets with high growth potential.

Access to different information

International investing can be a great way to diversify your portfolio and gain exposure to a wider array of economic and market forces across regions and nations. However, it is important to be aware of the risks involved, one of which is access to different information.

Many companies outside the U.S. do not provide investors with the same type of information as U.S. public companies, and the information may not be available in English. This can make it difficult for investors to make informed decisions and understand the risks involved. It is important for investors to do their due diligence and carefully research international companies before investing.

Additionally, international markets may have different regulations and standards for financial reporting and disclosure. These differences can make it challenging for investors to access the information they need to assess the financial health and stability of companies they are considering investing in. Language barriers can further complicate this process.

To mitigate these risks, investors can consider working with a broker or investment adviser who is familiar with the international market and can help navigate the information landscape. It is also important to remember that investing in international markets may require a longer time horizon to see returns, as economic growth and development can take time.

Despite these challenges, international investing can provide access to new opportunities and markets, potentially leading to greater diversification and improved risk-adjusted returns.

Changes in currency exchange rates and currency controls

Currency fluctuations can be influenced by various factors, including interest rates, inflation rates, and a country's balance of trade. Higher interest rates in a country can increase the value of its currency, while lower interest rates can decrease it. Inflation can lead to currency devaluation, as purchasing power decreases. A country with a trade deficit, where imports exceed exports, may experience a decline in its currency value.

Additionally, some countries may impose foreign currency controls that restrict or delay investors from moving currency out of the country. These controls can impact an investor's ability to access their investment returns.

Currency exchange rates also play a crucial role in a nation's economic health and can impact the real returns of an investor's portfolio. A higher-valued currency can make a country's imports cheaper and its exports more expensive globally. On the other hand, a lower-valued currency can make imports more expensive and exports more competitive.

It is important for investors to monitor exchange rates and consider the potential impact on their investments. While currency fluctuations can provide opportunities for higher returns, they also introduce risks that need to be carefully managed.

Different levels of liquidity

Liquidity refers to the efficiency or ease with which an asset or security can be converted into cash without affecting its market price. It is important for individuals and firms to pay off their short-term debts and obligations and avoid a liquidity crisis.

There are two main types of liquidity: market liquidity and accounting liquidity. Market liquidity refers to the extent to which a market, such as a country's stock market, allows assets to be bought and sold at stable, transparent prices. The stock market is characterised by higher market liquidity. If an exchange has a high volume of trade that is not dominated by selling, the price that a buyer offers per share (the bid price) and the price the seller is willing to accept (the ask price) will be fairly close.

Accounting liquidity, on the other hand, measures the ease with which an individual or company can meet their financial obligations with the liquid assets available to them. In other words, it is their ability to pay off debts as they come due. Financial analysts use various ratios, such as the current ratio, quick ratio, acid-test ratio, and cash ratio, to measure accounting liquidity.

When it comes to international investing, markets outside the US may have lower trading volumes and fewer listed companies. They may also only be open for a few hours a day. Some countries restrict the amount or type of stocks that foreign investors can purchase. These factors can impact the liquidity of international investments, making them less liquid than domestic investments.

Overall, while international investing may offer potential growth and diversification benefits, investors should be aware of the different levels of liquidity in foreign markets and consider the potential impact on their ability to convert their assets into cash when needed.

Legal remedies

International investing can be a risky endeavour, and investors may encounter problems with their investments. If US investors have a problem with their international investment, they may not be able to seek certain legal remedies in US courts as private plaintiffs. Even if they successfully sue in a US court, they may not be able to enforce a US judgment against a non-US company. Instead, they may have to rely on legal remedies available in the company's home country.

The customary international law rule of exhaustion of local remedies (ELR) requires individuals to seek redress for any harm caused by a state within its domestic legal system before pursuing international proceedings against that state. This rule aims to safeguard state sovereignty. In international investment law, this rule has been largely dispensed with, as states often consent in advance to international arbitration with foreign investors. However, some states have reintroduced a mandatory requirement to pursue or exhaust local remedies for settling investment disputes in their investment treaties.

US investors should ensure that any broker they work with is registered with the SEC or the appropriate state regulatory entity. It is generally against the law for a broker, foreign or domestic, to solicit an investment from a US investor unless registered with the SEC. If US investors work directly with a foreign broker not registered with the SEC, they may not have the same protections as they would if the broker were subject to US laws. Investment advisors advising US individuals on securities investments must also be registered in the US or eligible for an exemption.

Frequently asked questions