So many people dread investing in foreign markets thinking that it is very risky and complicated. While investing within the borders of the US guarantees you a better business environment and fewer risks, it denies you a chance to pursue more opportunities and expand your portfolio. Here is a list of five benefits that will definitely change your perception about foreign investment.
Increased Diversification of Asset Classes
Asset classes are categorized into equities, fixed income and cash equivalents. These classes are affected by the same laws and regulations and behave similarly in the market. This means that investing in asset classes in only one country predisposes you to serious problems in case the regulations change or the market stumbles.
Investing internationally allows you to spread your portfolio across several business environments affected by different laws and market conditions. It also gives you a chance to add more companies to your portfolio. One of the best classes you can try is stocks in emerging markets that do not have direct counterparts in the US.
There are certain periods where international stock markets perform better than the US stock market. For example, the period between 2000 and 2009 saw a decline in the Standard & Poor’s 500 index. It traded at a negative value (loss) for close to 10 years before recovering. One the other hand, the international stocks during the same period traded at a positive value, ranging from 1.2 to 12.8 percent. People who invested exclusively in the US stocks were significantly disadvantaged. Those who were clever enough to spread their investment portfolio to foreign markets had a reason to smile.
You Can Achieve Higher Risk-Adjusted Returns
Investors have better long-term prospects when they diversify in companies, asset classes and industries. The effect is even more significant for individuals who set up self directed IRA due to the huge earning potential associated with real estate and private placements.
Analysts have also concluded that it is risky to invest more than 50 percent of your equities in stocks from one country. The global stock market runs in such a way that forces that drive the stock market in the US are different from the ones that affect the UK or China. This means that an investor who spreads his portfolio across different countries is less likely to experience volatility over the entire investment.
The adoption of unhedged international funds promotes currency diversification. This form of diversification is quite helpful to investors who want to reduce expected volatility and risks. The larger point is that currencies have different volatility rates from many other asset classes and often operate on a different cycle. For instance, tough economic times may force the value of the US dollar to fall. The other currencies from countries not affected by the economic situation may gain against the dollar, meaning individuals who invest in these countries will be more likely to benefit from the situation.
Sufficient International Exposure
There is no way you will gain sufficient international exposure if you are not willing to get out of your comfort zone and explore business opportunities abroad. Investing in foreign countries gives you access to small capital or emerging stock markets. Stock experts will tell you that investing in emerging markets has a huge earning potential over a short period of time. You also have the privilege to explore new business opportunities and use them to maximize your profit margins. Investing abroad also allows you to gain a new image as an international investor or company. Potential clients and business partners will think more highly of you and the company when they discover you have a global presence.
The Final Thought
In a nutshell, investing internationally provides a wide range of investment opportunities at a low cost. A smart investor will grab any opportunity to invest in a foreign country without fear, knowing that the returns will be great.