What are the five risks of investing INTERNATIONALLY?
Most investors should have some of their investment portfolio allocated to international assets. These assets, which are investments based outside of the U.S., are important. This is because they provide an additional level of diversification as well as an opportunity to experience investment gains in companies that you would not have otherwise had exposure to.
The U.S. stock market makes up about 50% of the value of the total global stock market. That is a huge percentage, however it presents investors with an opportunity to invest in the other 50% of the world’s stock markets.
However, doing that does not come without risks that may be different than the risks you take by investing only in the U.S. This article will look at five of those risks that you must be aware of if you are going to invest internationally.
Risk #1: Foreign Exchange Risk
When you invest in companies not based in the U.S., you are automatically exposed to currency risk. Depending on the exchange rate changes between the U.S. dollar and the currency of the country you are purchasing you may lose (or gain) money on your investment regardless of what the share price does.
Risk #2: Unfamiliar with the Market
As a U.S. investor, when you invest in the U.S. you are buying companies and a market you are very familiar with. When investing in other countries, you will be buying into a country you may not be as familiar with. That adds to your risk level since you may get caught off guard by information you don’t have.
Risk #3: Political Risk
The political situation in a country can have a very dramatic impact on the share prices in that country. For example, Turkey has recently been having huge political issue and the result has been a stock market that has crashed substantially. As an international investor you need to be very aware of this political risk and the impact it can have your capital
Risk #4: Legal Risk
The laws in other countries can be very different than what we are used to dealing with in our U.S. investments. If there is a problem with the company that impacts your investment. There may be very limited legal recourse you can take to protect yourself. Even with publicly traded companies the different laws of that country can impact stock prices very negatively.
Risk #5: Liquidity Issues
Buying and selling stocks that are part of the S&P 500 is easy because there are a lot of shares available and a lot of investors buying and selling them. Depending on the international markets, that liquidity may not exist. That means that you may be able to buy shares in a foreign company. You may have trouble selling it when it comes time to liquidate. That can cost you a lot of money if you are not able to get out of a holding you need to sell.
The Easy Way to Avoid These Risks
All of these risk are substantial and can really hurt investors who choose to invest in global markets outside of the U.S. However, there is an easy way to manage these risks. That is by buying an international index fund that does all the investing in these markets for you. For example, the Vanguard Total International Stock ETF will give you international exposure in a diversified and low-cost manner.
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