|By Aina Ster|
June 12, 2019
The US economy is performing at levels not seen in decades. The stock market has generated substantial returns for 11 years, and many investors are hopeful that the bull market will continue unabated. However, the US market and its 4000+ publicly traded stocks is but one cog in the global wheel of investment opportunities. Years of growth in the US economy have translated into outsized returns on the Dow Jones Industrial Average, the NASDAQ, the SP 500, the Russell 2000, and other stock markets.
International Stock Investments Are Worth Considering
Therein lies a caveat: what comes up must invariably come down, and markets are notorious for their cyclical patterns. Investors are inclined to take an eclectic approach to their financial portfolios. This is known as diversification, and it is a failsafe strategy to guard against recessionary fears, bear markets, deflation, or economic shocks. Portfolio diversification takes on many forms. For example, investors may opt for safe-haven assets such as gold, or currencies like the Japanese yen and the euro. It is equally popular to diversify beyond one market into international markets. The growth potential in emerging markets is often much greater than it is in established financial markets where anemic gains stand to be had.
Economists, financial advisers, and savvy investors recognize the value of investing in international stocks. In fact, this practice is a powerful hedge against a downturn and it helps to prop up the stability of your portfolio over the long term. A home-market bias may prove favorable in the short term, but the interconnectedness of countries ensures that growth and prosperity must inevitably be shared and enjoyed by all nations. Various studies have been conducted over the years, indicating that it is beneficial to have an allotment of foreign stocks in your portfolio. That precise figure will vary from one investor to the next, but approximately 40% of your stockholdings should be foreign stocks. In the US, this figure is around 22%, far less than the recommended amount. It is foolhardy to invest all of your assets in a single investment vehicle such as the US market, stocks, bonds, forex, commodities et cetera.
By broadening your investments across multiple categories and markets, you are hedging against volatility. Many successful investors tap into different geographical markets, and the companies that dominate them. There is tremendous variance between the performance of the US market and the South African market, or the Israeli market and the Japanese market. It is certainly worthwhile contemplating each of these markets on their merits. Global investors take a holistic approach, encompassing the DJIA, NASDAQ, JSE, NIKKEI 225, CAC 40, DAX 30, FTSE 100, and others.
Cost-Effective Ways to Transfer Money into Foreign Markets
Of course, money transfers need to take place to facilitate investments in foreign markets. This is not as challenging as it seems thanks to many easy to use money transfer sites. Many reputable money transfer organizations now pepper the scene making it easy to facilitate rapid, secure, and cost-effective money transfers from one geographic location to another, with the intent of investing in foreign markets. The interest rates alone are more attractive in countries like South Africa than they are in the US, or the UK.
However, the risk/reward ratios need to be carefully evaluated to determine whether inflationary pressures and currency cross exchange rates warrant that type of investment. Nonetheless, all of this is geared towards reducing volatility and protecting the value of a financial portfolio from a downturn. There are ways to facilitate transfers to foreign markets through registered financial trading enterprises. These are done with exchange traded funds and mutual funds which are effectively asset holdings in foreign countries. Index funds for example track the performance of a foreign index, and many of them are country specific.
Every investor's appetite for foreign stocks is different
The precise figure that you are targeting is also subject to change, since market forces routinely shift the needle from day-to-day. Foreign markets, particularly developing economies are characterized by greater volatility, due to geopolitics or unstable infrastructures. It is safe to say that when developed economies are struggling, this tends to have a domino effect on developing economies. There is always growth potential in foreign markets and these present as lucrative investment opportunities. Foreign stocks are typically, although not always, subject to less transparency and limited information. Investors don't always have access to important financial documentation and reports to make informed decisions. There is also less legal recourse than there would be with the Securities and Exchange Commission (SEC).
Other issues to contend with include taxation on foreign assets, transactions costs, and the effect of currency conversions. Once you have assessed the implications of these types of investments, it is certainly worthwhile incorporating these stock options into your portfolio.
|Aina Ster is a Member of Macroaxs Editorial Board. Aina delivers weekly prospective on ongoing market and economic trends, analysis and tips from predictive analysis to forecasting across various financial instruments. View Profile|
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