Investing internationally often offers the potential for tremendous returns as compared to US investments while at the same time exposing the unprepared investor to potentially large losses. Of course, as with anything the devil is in the details. So whether there is profit potential or loss potential depends on the country involved as well as the actual security (stock, bond, real estate, etc). What is most important though is the fact that in the face of what is becoming an increasing global economy one should not ignore the international markets. As global trade and securities continue to evolve “foreign” (depends on where you are) investments will play a larger role in the portfolio of corporate and individual investors.
Before investing internationally it is helpful to understand risks specific to foreign investments and how they can vary from country to country. Briefly, the key additional risks are as follows:
Because of the variety of governments and the policies regarding private corporations there are certain risks associated with how a specific government policy might affect a corporation. For example, many of the emerging countries are still developing legal precedent on the status of corporations and whether or not they are independent in regards to the “state”. There have been instances in which public companies were taken over by a nation state and as a result the investors for that corporation were left with no recourse. Rare, indeed but it can happen. Of course the type of government involved and how long it has been in power has much to do with the likelihood of situations like this developing. The most important thing is to just be aware of the political environment and how it could effect a particular investment.
Because foreign investments buy/sell and calculate their value in foreign dollars there is always currency risk that must be accounted for by the individual investor. This has definitely been a factor in some of the large losses as well as some of the large gains in certain foreign markets as a whole. For example, the Peso in Mexico went through particular periods of instability during the later part of the 20th century and as a result investors from other countries were either treated to large losses or large returns – often in short intervals. So, even though a company may be profitable and doing well the currency of its country of origin may augment or intercede upon the overall return.
One of the most important principals of investing is to know what you are investing in beyond the name and ticker symbol. If you truly know the company and what they represent, and where they are and how they do business then you will naturally have an idea of the overall risk associated with the company. If you do not know these things then you need to talk with a broker or someone else who is knowledgeable about the investment you are considering. Knowledge always reduces risk. Legions are those who have invested in a foreign company (the Mexican “Wal-Mart” heard of it?) purely on the basis of hearsay only to be disappointed by either the lack of movement or the rapid loss in value. (This is not to say the Mexican “Wal-Mart” is a bad investment. This is just a common example of the type of information most people put their money into without checking the facts.)
Information is for educational purposes only and is not be interpreted as financial advice. This does not represent a recommendation to buy, sell, or hold any security. Consult your financial advisor.