What We Need to Know About Investing in Foreign Markets

by Kristina on January 19, 2011 · 1 comment

It is an important long term investment strategy to diversify our investment portfolio.  For some of us this includes investing in different types of investments, as well as in investments of foreign currencies.  Investing in Foreign Markets is becoming a more popular investment trend. We can invest in Foreign Markets by investing in Emerging Markets of countries that are not yet fully developed, or we can invest in Foreign Markets of already established economies.  Popular Emerging Markets include Brazil and India.  Established economies include Canada and the United Kingdom.

There are two ways that we can invest in Foreign Markets.  We can buy Foreign Market Securities in US Dollars, or we can exchange our US Dollars for Foreign Currency and then invest directly in a Foreign Market.  When we exchange our US Dollars for foreign currency we always have to consider the exchange rate as an additional risk factor. Any time that we invest in foreign markets there is an added risk in the exchange rate.  The value of our Foreign Investments may increase.  However, if our currency value decreases versus the currency value of the foreign market, we may actually be losing money overall.

One day it could cost us $1300 US Dollars to buy 1000 Euros and the next day it could cost us $1500 US Dollars to buy 1000 Euros.  Currency exchange rates change several times throughout the day.  If the exchange is 0.700, this means that for every $1 US Dollar, we will receive 0.700 Euros.  If the value of the US dollar decreases against the Euro and the exchange rate increases to 0.60, this means that for every US Dollar we will now only get 0.60 Euros.  This may be good for our investment because the value of the Euro is increasing.  However, at the same time it is decreasing the value of the US Dollar.

We also have to consider that volatility of Foreign Economies before we choose to invest in Foreign Markets. As we do not live in the foreign country, we do not experience their day to day economy.  It is very difficult to invest in something unfamiliar.  Emerging markets may have unstable governments, an unpredictable economy, and ever changing consumer spending habits, which can all influence the value of their foreign currency.  Investing in foreign markets is always higher risk than investing in local markets because of the exchange rate risk.  However, it is always good to diversify our investment portfolio. There are ways that we can invest in Foreign Markets without taking a lot of risk.

Two ways to invest in foreign markets without taking a lot of risk:

Buy some Government Bonds. To North American investors, Foreign Government Bonds are usually sold by the Federal Government.  Like most bonds, foreign bonds are available for limited amounts of time throughout the year. There is generally very low risk in Government Bonds because the odds of an entire Government becoming insolvent is very low.

Invest in Market linked GICs. Market Linked GICs are Guaranteed Investment Certificates that guarantee your capital, but not your interest rate.  Your interest rate will depend on a foreign market index.  Therefore, at the end of your term your capital could be returned along with some interest, if the foreign market index performs well.  However, if the foreign market index is negative at the end of your term, you could only have your capital returned. This is the chance that we take when we invest.  There can be no rewards if we don’t take any risks.

PS: Please be sure to do your own research, and make sure it makes sense for your goals before investing. These are just my opinions.

(Photo By Dichohecho)



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