How can you invest in international/foreign stocks, firms and markets - what are the risks involved overseas investing

" I have found that when the market's going down and you buy funds wisely, at some point in the future you will be happy. You won't get there by reading, "Now it is time to buy" " - Peter Lynch

Investing in international stocks offer diversification and possibly higher returns, but they also carry more risks in the form of currency value fluctuations, political instability, weak regulation, higher transaction costs and different accounting practices. In this article I like to share with you some of the ways by which we could reduce the risks involved in investing in international stocks.You may agree/disagree with me,please leave your comments at the end of this article.

1. Invest in Foreign Stocks through ADRs

American Depository Receipts (ADRs) is the most powerful way to reduce risk in international market (Thanks to JP Morgan who introduced it).ADR represents ownership in the shares of a non-U.S. company that trades in U.S. financial markets (eg. Columbian company Ecopetrol). ADRs enable U.S. investors to buy shares in international companies without the hazards or inconveniences of cross-border & cross-currency transactions. Since international markets don't move together, even if your U.S. stocks are going down, your ADRs might be rising. For better diversifications and minimal risk buy different high potential ADR stocks, operating in different international countries.

Investing in international stocks offer diversification and possibly higher returns, but they also carry more risks
Investing in international stocks offer diversification and possibly higher returns, but they also carry more risks | Source

2. Invest in Mutual Fund:

 Mutual funds provide more diversification (hence lesser risk) than most investors could achieve on their own. The fund will handle currency conversions and pay any foreign taxes, and is likely to understand the different operations of foreign markets.

There are different kinds of mutual funds that invest in foreign stocks.

  • Global Funds : They invest in both foreign as well as US companies
  • International funds: They invest in companies outside the United States.
  • Regional or country funds: Here you can decide in which geographical region you like to invest. For instance some invest in emerging economies, some in Europe
  • International index funds: They are index funds that replicate a foreign index

3. Invest in US traded Foreign Stocks

 There are some foreign stocks that trade in US as in local market (These are not ADRs). Eg. Canadian stocks trade in the same form in the United States as they do in the Canadian markets, rather than as ADRs.

The above three methods involve less work as you are trading in US. The following ways require more reading and understanding before investing. There are more risks involved in it but greater will be the return too

4. Look for outstanding management in BRIC economies:

The chance that the outstanding management in emerging markets is extremely low. More over, if in case something happens governments have the economic/political power to sort out the problem.

If you buy foreign companies located in faraway lands that rise to the top of their regional markets ,by the time the world’s biggest investment banks invite them to become an ADR, they’re pumping out profits.

Comparision of Domestic Index versus International Index returns

 Year
Domestic 
International  
Best Performer
1999 
21.0% 
27% 
International
2000 
-9.1% 
-14.2% 
Domestic
2001 
-11.9% 
-21.4% 
Domestic
2002
-22.1%
-15.9%
International
2003
28.7%
38.6%
International
2004
10.9%
20.3%
International
You can see that International investments are giving more return in the recent years.

Let me end this article by quoting Warren Buffet

"Diversification is a protection against ignorance" - Warren Buffet

**********************HAPPY INVESTING***********************************************


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