When it comes to investing, many experts agree that diversification is important. You are supposed to engage in asset allocation, and do your best to make sure that your investments are in different asset classes, sectors, and industries. The idea is that if one of your investment types fails, you will be able to make up of it with your other investments.
You don’t have to consider diversification as being confined to asset classes or sectors. You can also include diversity in terms of geography. Sometimes, adding foreign investments to your portfolio can be a smart move that allows you to protect your assets and possibly make more money over time.
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Your options when it comes to foreign investing are fairly numerous. You can invest across different asset classes when you engage in foreign investing:
- Stocks: There are stock exchanges in many other countries. You can invest in stocks on foreign exchanges around the world. If you are concerned about investing on a foreign exchange, though, you can still get a little international diversification if you look for foreign companies traded on a domestic exchange. This can be a good start. On top of that, it’s worth noting that there are stock index funds that concentrate on foreign stocks. You don’t have to engage in stock picking if you invest in a European index fund, or decide to go with an All-Pacific index.
- Bonds: Just as you can buy bonds from your own government, or a domestic company, it’s possible to go foreign. You can purchase bonds issued by the governments of other countries, including emerging market bonds that come with higher yields. And, just as there are stock funds to invest in, there are foreign bond funds that reduce the need to pick and choose.
- Real estate: In some countries, it’s possible to invest in foreign real estate. You do have to be careful, though, since there are pretty strict laws about who can buy property in some countries. Plus, you have to have the capital to buy property. Some investors get around this by investing in REITs. You don’t actually have to buy the property, but you add foreign real estate exposure to your portfolio.
- Commodities: It’s possible to invest on foreign commodity markets, if you have the knowledge and the stomach for it. There are also ETFs based on commodities that can help you invest more easily.
- Currencies: Another option is to get involved in forex trading. You can trade foreign currencies, and earn money. However, many consider forex to be volatile and risky, and you need to have the tolerance for it. If you don’t want to deal with the difficulties of forex trading, there are currency ETFs that are a little easier to trade.
As you can see, almost any asset class that you trade domestically can be traded as a foreign investment. You can even trade options in foreign markets. However, you do need to be careful, since there are risks involved as well.
Things to Consider Before You Start Investing in Foreign Assets
Before you jump into foreign investing, it’s a good idea to consider the risks. You want to make sure you understand what you are getting into before you start. For one thing, some foreign markets come with different regulations and standards. Make sure you know the rules associated with trading on a foreign exchange. It also helps to understand the investment, and the market. Don’t start trading currencies, or currency ETFs, until you have an idea of the fundamentals that drive the markets in question.
Some of the risks that come with investing in foreign assets include:
- Currency exchange rates: Sometimes, you have to complete transactions in currencies other than the US dollar. When this happens, you have deal with currency fluctuations, and the cost of conversions. Be aware that your returns can be affected by exchange rates.
- Volatility: There are some that believe that other markets are more volatile than US markets. If you are buying emerging market bonds, or investing in commodities on an emerging market exchange, there is a good chance that the swings are greater. This means that your chances of loss increase along with your chances of gains. The political situation in some countries, as well as global economic forces, can make your foreign investments more volatility.
- Liquidity: In many cases, you are dealing with reduced liquidity. You may find it difficult to turn your foreign assets into cash. Be careful, and make sure you understand how liquid your foreign investments are.
In the end, a little diversity into foreign markets can be a good thing. However, you need to be aware of the consequences, and do what you can to offset the rists.
Miranda is a professional personal finance journalist. She is a contributor for several personal finance web sites. Her work has been mentioned in and linked to from, USA Today, The Huffington Post, The San Francisco Chronicle, The New York Times, The Wall Street Journal, and other publications. She also has her own personal finance blog: Planting Money Seeds.