Justin Grossbard, Founder of Innovate Online and Compareforexbrokers.com.
Whether you’re a novice entrepreneur or investor, you’ve undoubtedly come across peers who would stress on the importance of diversifying your investment portfolio by investing in international bonds and currencies. If you’ve yet to step into that realm, it’s natural to feel hesitant towards approaching unchartered territory. But at the end of the day, especially when finances are at stake, it’s best to not keep all your eggs in one basket by taking the plunge and diversifying. Diversification can help reduce the overall risk of your portfolio by spreading your investments across different asset classes and geographic regions.
As founder of company that connect clients with brokers, international trading has always been on my radar. And recently, investing in these markets have become my secondary interest.
Investing solely in domestic assets may seem comfortable, however may expose your portfolio to the risks that are associated with domestic economic and political events. This includes recessions, policy changes and natural disasters. Yes, the same does apply, by extension, internationally. However, investing in international assets can potentially offset losses in your domestic investments by way of gains in your international investments. If the domestic market experiences a downturn, the international market may continue to perform well in parallel, thereby providing a buffer against losses.
Concerns Tied With Investing In International Assets
The risks that tend to make investors hesitant (automatic download) toward international investments include higher transaction costs, currency volatility and liquidity risks. It goes without saying that the value of investments can (and will) be impacted by changes in the value of the currency itself. When it comes to navigating different economic and political environments, expert insights would be needed before taking steps forward, as matters can get intricately complex.
For example, as stated on Charles Schwab, the Canadian economy, including its banks, is particularly reliant on natural resources. Meanwhile in Japan, the influence of global financial conditions affects their stock market. In the United States, “the market acts a lot like one big technology fund,” as “technology drives performance.”
However when all is said and done, with diversification comes potentially higher returns. If you’re an entrepreneur or investor and you’re looking to expand your portfolio, you need to understand the benefits and risks to ensure you’re making informed decisions.
Diversification Benefits Of International Investing
In my experience, international assets typically do not move in tandem with domestic assets. This, by extension, helps offset losses that might be in one part of the portfolio, due to gains in another part.
The differences in growth rates, interest rates, and inflation rates (compared to the domestic market) is what ultimately unlocks opportunities for profit. To reiterate a previous point however, when you think of things inversely, informed decisions do need to be made with the help of expert advice, as higher returns come with higher risks, such as fluctuations in currency exchange rates. Some of the key influences on exchange rate movements include interest rates and inflation, trade and market expectations.
When investing in foreign assets, you would be exposed to these fluctuations. Let’s assume you bought a bond that is denominated in Currency X, and Currency X were to weaken against your own home currency—you will receive less in returns when you sell the bond, because of the lessened value of Currency X. It is also important to factor how a country’s economic and political stability impacts the value of its currency and the performance of its bonds, and understand how to navigate through these risks and opportunities.
Navigating The Risks And Opportunities Of International Investing
Despite the risks, investing in international bonds and currencies can be a valuable addition to a well-diversified portfolio. These are the steps I recommend you take to increase your chances of success while navigating those risks.
• Begin by researching and analyzing international markets: It is highly recommended to thoroughly research and analyze the markets well before investing in international bonds and currencies. While at it, be sure your research includes the assessment of economic and political stability, currency exchange rates, and interest rate policies. On that note—you best stay up-to-date on currency exchange rates, so you can adjust your portfolio as needed to minimize your risks.
• Diversify your investments across multiple countries and regions: To mitigate risk, investors should diversify across countries and regions, rather than putting all their international investments in one market.
• Start off by working with a seasoned financial advisor: International investing can be complex and may require the expertise of a financial advisor who specializes in this area. After all, there’s much to consider when weighing out the differences between developed markets, and emerging markets.
So how much should one invest internationally? According to research by Vanguard, “at least 20% of your overall portfolio should be invested in international stocks and bonds. However, to get the full diversification benefits, consider investing about 40% of your stock allocation in international stocks and about 30% of your bond allocation in international bonds.”
The bottom line is that regardless of how your investments are divided, you should continue to focus on your investment objectives, costs and prospective returns, all while balancing each of those factors in parallel with your risk tolerance. In doing so, you would be better positioned in maximizing the benefits, while minimizing the risks of your investments.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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