One of the cornerstones of investing is diversity . You are probably very aware of the importance of diversifying across asset classes, as well as diversifying across industries. Many people, though, overlook foreign investments when considering how they can add diversity to a portfolio.
This can be a mistake. Looking only to domestic investments can limit your investment portfolio and result in missed opportunities. Take a look beyond our borders. There’s a good chance that you can find some solid investments that can enhance your portfolio, and help you grow your wealth.
Foreign Investment Options
You have several options when it comes to foreign investments. As you might imagine, you can invest in foreign stocks and bonds. There are foreign companies that trade on U.S. exchanges — which can simplify matters. However, it is also possible for you to trade directly on foreign stock exchanges. Make sure you understand how this works before jumping in. Foreign bonds can also help you diversify your investments. In many cases, foreign bonds pay higher yields that Treasuries (including in emerging markets) — but that’s often because the risk of default is considered higher.
You don’t have to focus on individual stocks and bonds, though. Here are some other options for foreign investment:
- Funds: Whenever you are starting out with any new type of investing strategy, it can help to invest in funds . This is true of foreign investing. There are equity funds made up of foreign investments, including regional funds. You can invest in index funds that follow foreign indexes (there are also ETFs that follow foreign indexes). And, as you might expect, there are a variety of foreign bond funds and foreign currency ETFs that you can invest in.
- REITs: There are a number of international and global REITs  that can make it easy for you to get a piece of the foreign real estate scene. There are also global real estate mutual funds that you can invest in.
- Foreign currencies and commodities: If you have the stomach for it, and if you understand how it works, it might be worth it to do a little forex trading , or invest in foreign commodities.
Risks Associated with Foreign Investments
You have to realize, though, that there are risks that come with foreign investing. While all investment carries risk, there are a few things to take into consideration:
- Currency exchange rates: You might not be investing in dollars all the time, and you might not receive dividends in dollars. Returns can be affected by currency market fluctuations, and you might have other fees to pay in the currency conversion.
- Increased volatility: Relative to U.S. markets, many believe that foreign markets — especially in developing and emerging markets — experience wider swings and increased volatility. Also, in some areas the political situation could affect markets quite a bit; social volatility can cause some turmoil in foreign markets to a degree not often seen in the U.S.
- Less liquidity: In some cases, it might be harder to convert your holdings back to cash with foreign investments.
- Different rules: If you are investing directly using foreign markets, you have to be aware of the rules. Otherwise, you might find yourself running afoul of some regulations and accounting standards that could cost you.
You don’t have to go all the way to foreign markets to increase your diversity in this area. There are plenty of options available close to home — and in U.S. dollars — that can improve your portfolio. However, if you do decided to invest directly using foreign exchanges, make sure you understand the rules.
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