Should You Invest In Foreign Stock Markets?
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The value of the total global stock market is around $68 trillion. According to reports, foreign stock markets may outperform domestic stock markets in the coming decade. Such an analysis might urge several investors to look at investing in foreign stock markets and make suitable changes to the allocation of their funds. Wondering what are the factors that one must consider before investing in foreign markets?
Top 7 Things to consider before investing in Foreign Stock Markets
1. Diversification – a key benefit of investing in foreign stock markets
Diversification is an important factor for creating a strong investment portfolio. Investing in foreign stock markets can help you diversify your investment portfolio. The reason is quite simple. It is wise to spread out the risk and not invest all the money in one market. Many financial and investment experts are of the opinion that not investing in stock markets outside of one’s economy means missing out on numerous investable stocks. Investing overseas can be a good way of investment diversification and reducing risk.
2. Unfamiliar terrains can be risky
If you are unfamiliar with the market and economy of a certain region or country, it is better to avoid investing in there. Investments require a certain amount of knowledge and understanding of the economy. A lack of either could be highly risky. A smaller investment allocation may be advisable for those considering investing in unfamiliar markets.
3. Possibility of high risk and high return
Whether one must invest in foreign stock markets depends on their appetite for risk. It also depends on the strategy and plan for their investment portfolio. Foreign stocks could turn out to be highly risky. At the same time, they can also bring high returns. Wondering how? Since the economies of different countries perform differently, it could be beneficial to invest in the stock market of a particular country when its economy is doing well.
4. The difference in the value of currencies can affect returns
When the currency of a particular economy depreciates in comparison to the currency of the economy in which one has invested, it could bring in profitable returns. The situation would be the opposite if the currency appreciates.
5. Tax – a key factor
Tax is a key factor to consider when investing in foreign stock markets. Different countries have different taxation rules. It is better to understand the effect of tax on returns that you may earn before investing. To reap maximum returns, it is advisable to consult investment advisors who are familiar with international stock market investments. Just like tax, inflation too can affect your investments. Calculate how taxes and inflation affect your investment here.
6. Moderation in investing
A number of financial experts suggest moderation while investing in international markets. About 15% to 20% of investment in foreign markets is a good place to be in. It is good enough to make a difference to your investment portfolio and at the same time, it is not too risky. As you get comfortable with international investments, you can gradually increase your investments.
7. An evenly balanced international portfolio
Financial advisors suggest balancing international investment portfolios by investing in the stock markets of different countries and regions. As economies of all countries perform differently, the chances of losses and gains balancing out each other are higher when invested in different stock markets.
To sum it up
Strategic investments in foreign stock markets can be profitable, as long as you keep certain factors in mind. The key is to be well-balanced, well-diversified and well-informed all the time.
Are you an investor keen on exploring international stock markets for investing? Reach out to financial advisors for their guidance and advisory services.