Going Global Can Bring Rewards –But Know the Risks
By Saghir Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
While so many different U.S. stocks and mutual funds available, many investors overlook the potential benefits of investing outside the U.S. The oversight could prove to be a detriment to a long-term investment portfolio. While the U.S. provides an array of investment opportunities, international investing offers a broad selection of investment alternatives, the potential form competitive returns, and increased diversification that can reduce investment risk –all compelling reasons to explore global investing.
Investing in international market tends to increase diversification and reduce portfolio volatility. As many investors know, the ups and downs of stock market cycles are affected by many variables, including investor perception, interest rates, political developments, inflation and a host of other economic indicators. The direction and strength of these variables is not consistent from one country to another, so foreign market movements do not typically mirror those of the U.S. stock market. For this reason, overseas investing can cushion a portfolio against a significant drop in the U.S. stock market and vice versa, making it easier to ride out downturns in any one market.
The United States is clearly a global economic leader. However, because of the size of its economy, the U.S. cannot sustain the rapid growth rates of less developed countries without triggering inflation. The additional room to grow and opportunity to grow faster are two characteristics of foreign economies that are very attractive to many investors.
Foreign countries are also host to some of the world’s leading companies. For example, while companies such as Nestle, Nokia, Adidas, and Burger King are all household names in the United States, each is based in a foreign country.
The potential rewards of international investing are compelling, but these rewards are accompanied by special risks that should be carefully evaluated by every investor.
Because each stock is priced in the currency of its home market, investors in overseas companies assume currency risk. For example, companies traded on the Japanese market are priced in yen, so the value of an investment in a Japanese company will hinge partly on the exchange rate between the dollar and the yen. Because exchange rates fluctuate, it can be difficult to accurately evaluate an investment opportunity.
Liquidity is also a variable to keep in mind when investing overseas. Because foreign markets typically have lower trading volumes than domestic markets, it may be difficult to trade certain securities in the absence of supply or demand. In these instances, profitable trading can become extremely difficult. Liquidity risk is intensified in emerging markets, where volume can be especially thin.
Another concern associated with international investing is political instability. Major political events such as elections, changes in economic policy or trade agreements, and civil unrest can threaten foreign markets. Such events can occur with very little notice, so international investors must carefully monitor the political and economic stability of foreign countries.
Overseas investors must also keep in mind that foreign companies do not face the same type of disclosure regulations that U.S companies must comply with –a discrepancy that makes research more challenging and time consuming. Accounting methods differ from country to country, further increasing the complexity of investment research.
Given the rewards and risks of overseas investing, many investors wisely choose to diversify their portfolios with foreign exposure through international mutual funds or the guidance of a qualified financial advisor. Given the complexities of regional markets and the laws governing international trade, you must perform due diligence prior to any global expansion. Start by seeking the professional advice of your own attorneys and accountants, then take advantage of free or low-cost support that is available from federal agencies and other sources. This approach helps investors take advantage of overseas opportunities under the guidance of an experienced professional who can help manage some of the risks. To learn more about international investment opportunities, contact your financial advisor.
When moving into global markets, a go-slow approach can be best. Those counties and markets have been there for years, and they will still be there when you are ready. Prepare an extensive business plan, tailored to your strategic goals and expected global locations. Expect changes and surprises, and give yourself the flexibility to adapt to new conditions. In a rapidly globalizing economy, opportunity can be found the world over, but multinational business poses significant challenges. A poorly planned international venture can waste time and money—and may lead to a real business disaster. By understanding and preparing for the complex nature of global business, you can find growth and success beyond your borders.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)
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