MONEY MANAGEMENTFrom the Virginia Society of Certified Public Accountants - Presented by Dean Knepper, CPA, CFP®
INVESTING INTERNATIONALLY: HOW, WHY AND WHAT TO WATCH OUT FOR
(September 23, 2005) — You might be surprised to learn that more than half of the world’s investment opportunities are outside the U.S. If you want to widen your investment boundaries, read what the Virginia Society of CPAs says you should know about investing abroad.
How to take your portfolio overseas
There are basically three ways you can invest internationally: through mutual funds, American Depositary Receipts or direct investments in foreign markets. Mutual funds are by far the easiest way to invest and offer a number of choices. Global funds invest all over the world, including the U.S., while international funds generally limit their investments to companies outside the U.S. Regional funds specialize in stocks from one region of the world, such as Latin America or Europe, and country funds invest in just one country.
American Depositary Receipts, or ADRs, allow shares of companies traded on foreign stock exchanges to trade on U.S. stock exchanges. An ADR is actually a registered security issued by a U.S. bank representing shares of a foreign stock. When you buy and sell ADRs, you are trading in the U.S. market, and your trade is settled in U.S. dollars.
If you’re looking to buy stock in a company that trades only on a foreign stock exchange, a broker can conduct the transaction for you.
Why go global?
Most investors who buy stocks in foreign companies cite increased diversity as their key motive. Since international markets sometimes behave differently than U.S. markets, spreading your investment risk among several countries can help lower the volatility of your portfolio and may limit your losses should a particular market fall.
Investing abroad also opens new opportunities for potential growth, particularly within emerging markets. Of course, you need to balance these potential advantages against the challenges and risks inherent in investing abroad.
Watch out for these risks
Investing in international markets poses three key areas of risk. The first involves currency risk. Changes in the exchange rate between the foreign currency of an international investment and the U.S. dollar can increase or reduce your return.
The investor who buys stock in foreign companies must also be aware of political, economic and social factors that may affect the value of his or her investment. Changes in political leadership, civil unrest or restrictive trade agreements are several examples of events that can impact market returns. Fund management fees are also often higher to compensate for the added skill and research required to invest overseas. This increased expense will affect your overall return.
Finally, there are the challenges that come with investing in markets that operate differently. One important factor to keep in mind is that each country has its own financial reporting requirements, some of which vary from those in the U.S. Similarly, differences in accounting practices may make it more difficult to compare foreign and domestic investments. Since transaction fees for investing abroad are often higher, you may need to spend more money than you would to buy stocks on a U.S exchange.
Do your homework
Despite the challenges of foreign markets, CPAs generally agree that investing
abroad can be a good way to grow your portfolio, particularly if you maintain
a long-term perspective. Learn as much as you can about the stocks you are
considering and the political, economic and social conditions in the company’s
home country. Then be sure that the investment fits into your overall strategy.
The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.
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