How to Diversify with International Investments I Investing 101 I Kristal.AI
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The Basics of Investing in International Markets

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International investing, as the name suggests, is a strategy in which investors choose global investment instruments in an effort to diversify their portfolio. This also allows them to spread their investment risk across foreign markets and companies, increasing their scope for higher ROIs. This can be extremely beneficial for investors who want to mitigate the risk of investing within their own country due to a turbulent market. In this article, we will tell you all about international investing, the factors that you should consider while investing in international funds, and whether international investments actually mitigate your risk.

Factors to Consider While Pursuing International Investments

As an investor, you can choose from a wide selection of stocks, bonds and mutual funds when considering international funds. One can even choose newer investment avenues such as cryptocurrency if one is so inclined. However, before you pick a specific investment, you must consider an array of factors that determine whether an investment is even worth your while or not.

International Government Debt

Governments from different countries issue a certain debt in order to carry out their financial responsibilities. This is true for both developed and emerging countries. However, with developed countries, one can expect a lower level of risk. As a result, investors looking for a more conservative portfolio can select investment instruments from such countries. On the other hand, emerging countries offer immense potential but also offer higher risks, making them ideal for investors with a higher risk appetite. In order to understand whether you should invest in a certain country’s financial instruments, you should analyse their credit market ratings to know what to expect.

International Indexes

Global indexes are a part of the equities market and can be very lucrative investment instruments. Most of these indexes include stocks from all parts of the world, with the Vanguard Total World Stock Index Fund and FTSE Global Cap Fund Index being leading examples. Equities belonging to developed markets typically offer lower risks than emerging market’s equities. However, the latter is one that is considered to be in high demand amongst most international investors.

Risks Associated with International Investing

Some of the risks associated with international investments include the following:

  • Low liquidity
  • Any significant economic, political or social events that disrupt the market
  • Changes in market value
  • Fluctuations in exchange rates between different currency
  • Varying market procedures and operations
  • Less access to vital information

Thus, the question arises, how much risk mitigation is possible with international investments? As an investor from Asia, it is crucial to understand that though international instruments belonging to the US may seem like steady investments (as the US is a developed nation), the dangers of doing so lie in the fact that US stocks often tend to underperform when compared to international ones. Of course, the reverse has been true at certain periods too, however, a long term look at the market can show you that this is more often than not the case with US stocks. So, if you are looking to invest internationally, do not be swayed by the promise of the American Dream and attaining it in your country. Consider non-US stocks in your portfolio instead. Including as little as 10% of such stocks in your portfolio can offer you the diversification you desire, along with good returns over a long term.

Benefits of Investing Internationally

If you are wondering how international investments can benefit you, the following are a few ways to consider:

  • Many countries make it a practice to offer certain tax benefits to foreign investors. These countries are known as tax havens.
  • Investing off-shore is a way to ensure that you can protect your assets from seizure, should you encounter any trouble in your homeland.
  • Investing in international instruments can also give investors a degree of privacy when it comes to their funds.
  • This is a great way to diversify your portfolio.

Cons of Making International Investments

There are a few downsides to international investments that you must consider as well. These include:

  • International investments can be rather costly to set up. This cost depends on the country you are looking to invest in, however you can expect it to not be inexpensive.
  • Different countries have different tax laws when it comes to their own citizens investing abroad. You should find out about your country’s laws before investing so that you do not accidentally make any mistake that may cost you further.

The Last Word

As a new investor with diversification on the mind, you can certainly consider index funds, mutual funds, stocks, and bonds that belong to international markets. These financial instruments are the most accessible to international investors and you will find many options that align with your risk profile.