With the current trade war going on between the U.S. and China, you’d think global investing is a risky thing to do. You’d be partially right, but that doesn’t mean you should avoid investing abroad altogether.
Despite international investing being recommended by financial advisors, people are still skeptical when it comes to investing their money abroad.
Why invest internationally? Here are the pros and cons.
The Pros of Investing Internationally
Because international markets are also called “emerging markets,” they have huge potential for growth. Many huge companies are based overseas and more that have yet to be properly valued by the market. For example, based on a 10-year period ending in 2007, the return for international equities was almost double the return for domestic equities. If on target, foreign stocks will continue on this trend over the next decade.
Because a large portion of the world’s stock is international, you’d be missing out on a large pool of investment opportunities if you don’t invest abroad.
Furthermore, by investing overseas you diversify the risk in your portfolio and reduce volatility. By doing this, you hedge your losses domestically. When U.S. stocks tank, international stocks may do well. Although diversifying is still a good bet, keep in mind that the development of economic globalization has tied major markets more closely together.
Lastly, over the long term, the performance of international markets has been doing well rivaling that of the U.S. stock market.
When it comes to picking a mutual fund to invest in, it should meet your investment objective and risk appetite. It is usually recommended that younger investors choose investments that have a higher risk, but a higher upside, as they have a longer horizon until retirement.
The Cons of International Investing
- Political and economic risk: some countries have political instability, which could affect any investments you might have in those markets.
- Regulatory risk: countries may lack the same rigorous accounting standards we have in the U.S. This could give you inaccurate information, making your assessment of investments difficult.
- Currency risk: Fluctuations in the value of the currency your investment is denominated in could lead to swings in your portfolio. Even if your investment does well, a strengthening U.S. dollar would lead to a decrease in value. However, this isn’t considered a huge risk because across a longer horizon currency risk declines. In fact, international exposure may help in the event the U.S. dollar starts losing purchasing power.
- Fees: the costs associated with investing internationally are often higher.
- Irregular dividends: another disadvantage of foreign stocks is companies overseas often don’t pay consistent dividends like U.S. corporations. There are companies on a list called the “dividend aristocrat” list. These companies have raised their annual dividend each of the last 25 years.
Concluding Thoughts
Something that’s worked for us and is a growing trend among the younger generation is investing in index funds with low expense ratios. One, most people either don’t know how to or don’t have the time to research and understand the market. Two, not even professional asset managers can consistently beat the market in the long-term. The icing on the cake is, with low expense ratios, you’re not paying exorbitant fees to a money manager to manage your portfolio.
We have about 20% of our investments in an index fund that tracks the international market (VTMGX – Vanguard Developed Markets Index Fund Admiral Shares).
If you insist on investing in individual stocks, choose among the dividend aristocrat list.
Are you invested in any international stocks?
Which ones have been performing well for you?
