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Should You Invest in a Foreign Stock Market?

One of the pieces of advice you are likely to receive about investing is that you need to make sure to diversify your portfolio [3].

However, diversification isn’t just about asset class and sector. Diversity also includes geography. For true diversification [4], you need to consider the where of your investments.

For some investors, it’s possible to do this by investing on a foreign stock exchange. A foreign market can provide you with access to different companies and opportunities.

What are the Major Foreign Stock Markets?

Most developed countries and emerging countries have stock markets that you can trade on — if you meet the requirements. Andrew Schrage is a former hedge fund analyst with experience investing in foreign markets. “The top five foreign markets to invest in so far for this year are the Philippines, Kuwait, Argentina, the United Arab Emirates, and Japan,” he says.

However, in terms of ease, Schrage recommends the London Stock Exchange. “It’s fairly easy to find a broker here in the U.S. who can offer insights and tips for how to invest effectively in the London Stock Exchange. It has also experienced gains somewhat similar to those of the New York Stock Exchange so far this year.”

Other popular foreign markets include:

There are also a number of stock exchanges owned by Euronext throughout Europe (Euronext merged with NYSE in  2007, and the result was the first global equities exchange), including locations in Amsterdam, Paris, Lisbon, Belfast, Brussels, and more.

Should You Invest on a Foreign Stock Exchange?

“Investors need to understand that volatility exists everywhere,” says Schrage. “Foreign stocks can often change course without warning due to civil unrest, political instability, and a host of other in-country factors.”

He also points out that there might be expensive transaction costs. Additionally, “you may also find yourself simply unable to gather much information about a foreign stock, as reporting requirements in foreign nations can differ greatly from those in the U.S.,” Schrage continues.

You should also be wary of liquidity issues that can affect your ability to sell investments bought on foreign exchanges, and be aware of the possibility of currency risk.

Theodor Tonca, a principal at Graham Theodor & Co., and organizer at the Vancouver Value Investors Club, points out that “one needs a larger than average margin of safety when investing in foreign locales.” Tonca agrees with Schrage that Japan is a good choice right now. “The Bank of Japan’s misguided monetary policy of quantitative easing has…helped push equity valuations much higher.” He also points to the fact that many Japanese companies listed on the Tokyo Stock Exchange have more than a decade of profitability behind them and little debt on their balance sheets. Plus, “in a lot of instances [these companies] pay a dividend to boot!”

While Tonca also suggests Malaysia as an interesting option, he also cautions those who aren’t experienced with reading balance sheets and understanding how to find a true bargain.

The good news is that you don’t have to go directly to a foreign exchange to add foreign investments to your portfolio [5]. Consider your situation and the risks, and then decide if investing in a foreign exchange makes sense for you.

(Photo: StockMonkeys.com [6])