Financial Planning for Regular Folks
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Pros and Cons of Investing in Foreign Markets

 

 

Purchasing shares of foreign companies is a tempting option for anyone looking to add diversification to their portfolio. However, investing in foreign markets usually comes with higher risks than the typical U.S. investment due to higher volatility. Lack of transparency and regulations can also be problematic.

Consider these pros and cons before deciding if foreign markets are a good option for you:

Action Guide: Pros and Cons of Investing in Foreign Markets

Pros and Cons of Investing in Foreign Markets
 

Growth Potential

Pros

‣ Some foreign markets have a huge potential for growth

‣ There are new investment opportunities all the time

‣ The overall performance of foreign markets is similar and sometimes superior to the U.S. market

Cons

Be aware of the political and economic risks. Some countries are stable, but other markets are highly volatile due to events that are difficult to predict

Currency

Pros

‣ Investing in a currency that gains value will result in a higher yield

Cons

‣ There is a risk that the currency you invest in will lose its value

Cost

Pros

‣ You can build a good portfolio with low fees if you invest in a currency that is not as strong as the U.S. dollar

Cons

‣ The exchange rate might make some investments less interesting

‣ Fees can be higher than on the U.S. market

Foreign Brokers

Pros

‣ There are some very reputable foreign brokers with reasonable fees

‣ You have the option of investing in American depository receipts if you do not want to go through a foreign broker

Cons

‣ Some countries have very little regulations brokers have to follow

‣ There can be a lack of transparency and protection for the investor

‣ You’ll have to wait a while before the money you want to withdraw is sent to you

Foreign Companies

Pros

‣ You have the option of investing in a wide range of companies and industries

‣ It’s easy to build a diverse portfolio

Cons

‣ Some countries do not require companies to follow any standards when it comes to sharing financial information with investors

‣ Researching foreign companies can be difficult

‣ Some foreign companies use unethical practices

The Bottom Line

Pros

‣ Foreign markets are a great way to add diversification to your portfolio

‣ Investing in foreign markets provides you with a safe position in case the U.S. market crashes

Cons

‣ Foreign markets are highly volatile

‣ Foreign investments are not as accessible as the U.S. market

 
 

 
 
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