Back in first-grade, you learned that U.S. territory ended where Mexico’s or Canada’s began. Geographically speaking, that is still true. But when it comes to investing, you don’t have to remain within U.S. borders — because you can find opportunities anywhere in the world.
This fact shouldn’t surprise you. After all, we all buy a great many products produced outside the U.S. — and the companies making those items are likely listed on a stock exchange somewhere.
But there are a lot of foreign companies. How can you know which ones offer the best investment potential? And when you buy shares of international stocks, is there anything special you need to know?
• Special risks — Every investment, no matter where it originates, carries some type of risk. But if you’re evaluating a foreign stock, you have to consider the usual risk factors: strength of management, competitiveness of products, etc. and then look at some special risks, including considerable changes in market value, lack of liquidity, political instability, currency fluctuations, economic climate, foreign taxes and differences in financial reporting standards.
As you’ll notice, most of these elements share a high degree of unpredictability, so you can’t plan for them in your assessment of a foreign stock’s overall risk. But you can at least factor in these uncertainties when making investment decisions.
• Diversification — Some investment principles are universal and diversification is certainly one of them.
By investing in foreign stocks, you can help diversify a portfolio that may be exclusively devoted to U.S. companies.
But even within your global stocks, you can diversify by company, industry and country. This last item is particularly important; if a country is going through some type of turmoil, the effects can drag down the entire economy and all industries.
• Hot regions — Every so often, a particular region grabs the attention of market watchers. The Pacific Rim, Latin America, Western Europe, all have taken their turns as hot regions in which to invest. However, by the time you get around to investing in these areas, they may already have begun to cool off.
And, in any case, a hot region does not guarantee a sizzling investment. Evaluate special risks and your diversification needs before jumping on the bandwagon of a particular country or region.
• Limit Foreign Holdings — Ultimately, you’ll probably want to limit your foreign holdings to no more than 10 to 15 percent of your overall portfolio.
But don’t ignore international stocks. Keep in mind that the U.S. represents only 30 percent of the world’s economy, so you have several continents’ worth of possibilities out there.
Mike Blaes is a licensed financial adviser with Edward Jones. For more information, call (928) 476-6427.