Top 5 Risks of International Investing for Beginners
Investing in international markets presents significant opportunity. Global investing is not for the faint of heart, but it is possible make some decent cash, especially if you time your investments with the growth of emerging markets -- but the road is not without peril. Consider international investing as a portion of your portfolio, but read on for what you'll be up against:
5 Risk Factors
1. Transaction ExpensesInvesting internationally typically comes with higher expenses across the board compared to investing here in the United States.
2. Currency RiskTo invest internationally, you must exchange your U.S. dollars for the currency of the country in which you plan to invest -- and when you sell, the money gets exchanged again. This adds another level of investment risk to your overall ROI, especially if the U.S. dollar increases in value in the interim.
3. Political InstabilityWhen you invest internationally, you're at the whim of foreign governments. Political instability can arise at the drop of the hat -- consider, for instance, Greece, Italy, Spain, Syria, or Iran. The collapse of governments abroad or other political calamities can bog down returns, and, in extreme cases, can make it entirely impossible to withdraw your capital.
4. Limited InformationThe accounting practices and reporting requirements of overseas nations just aren't the same those in the States. Crucial information can be difficult to acquire, and in many cases, it may not be available at all. If you can get a prospectus, you can never be sure that its 100% accurate. That's not to say you should ignore international investments -- just be sure that you always remain aware. You may have to deal with nonstandard accounting practices and sketchy reporting guidelines.
5. Decreased LiquiditySome foreign markets trade at much lower volumes compared to the major exchanges in this country. There could be fewer investing options, and the markets may not be open during all traditional business hours . You may also pay a higher price to purchase foreign shares, and when you're ready to sell the stock, you could experience trouble locating a buyer.
Final ThoughtsUnless you are comfortable with an element of risk and can afford potential losses, reconsider investing internationally. There's no doubt that international investing presents a long line of potential benefits, but the risks are significant. When you're considering potential gains, don't forget to consider potential losses, and account for the additional risks that can augment these losses. If you are uncomfortable investing directly in international equities, consider investing in international funds and ETFs. You still get most of the benefits. And by working with U.S.-based funds, you are substantially reduce your risk exposure. What other risks of international investing can you think of?
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