How Do I Invest in Foreign Markets?

Foreign investments diversify your portfolio but carry risks.

Investors look to overseas markets to diversify their portfolio. Investing in foreign companies with strong growth sometimes can offset weak performance by their American counterparts. International investments also are coveted as a means to profit from variations related to overseas exchange and interest rates. Smaller investors typically consider buying mutual funds to gain entry into foreign markets. Categorize foreign investments according to risk, prior to making investment decisions.

Things You'll Need

• Brokerage account
• Financial statements
• Annual reports

Instructions

Identification

1. Review your financial statements to calculate the amount of money that may be allocated towards foreign markets. In general, foreign markets are riskier than American investments. Novice investors should limit foreign investment exposure to less than 15% of their overall portfolio.

2. Differentiate between asset classes. Foreign government bonds offer the lowest amount of risk. In terms of stocks, multinational corporations provide the most stability.

3. Identify mutual funds by asset class concentration. Mutual funds are typically divided into stock and bond funds. Blended funds invest in stocks and bonds.

4. Group mutual funds into global or international funds. Global mutual funds invest in U.S. and foreign securities. International mutual funds invest exclusively in foreign companies.

5. Categorize foreign markets by nationality and levels of economic development. Heavily industrialized nations carry less risk and are associated with the G7, comprised of the U.S., United Kingdom, France, Germany, Italy, Japan and Canada. The risk but potential gains increase by investing in Brazil, Russia, India and China. Finally, emerging markets are the riskiest group of foreign investments because of political and economic instability. Nigeria is an example of an emerging market.

Buying International Investments

1. Read the mutual funds tables to find investment ideas that match your goals.

2. Target mutual fund research based on your risk tolerance and knowledge of specific sectors. For example, conservative investors might prefer foreign government bond funds. Meanwhile, investors with extensive knowledge of natural resources can explore nations that are rich in commodities. Canadian, Australian, Brazilian and Russian markets are heavily influenced by demand for natural resources.

3. Contact mutual fund companies for annual reports of your prospective investments. Compare mutual funds of similar class, according to expenses and performance.

4. Purchase the mutual fund directly, either through the fund company, or with the help of a broker. Long-term investors should consider making automatic monthly contributions to reduce risk.

5. Consider exchange-traded funds (ETFs) for more frequent trading. ETFs are investment pools that trade throughout the day, like stocks. Similar to mutual funds, ETFs are grouped by asset class, geography and industry.

Tips & Warnings

• Monitor international interest rates. Nations with lower interest rates attract borrowing, investment and growth. Lower interest rates also translate into lower home currency values, which are ideal for export economies.

• Foreign investments carry exchange rate and political risks. For example, foreign assets are less valuable when the dollar strengthens. At that time, foreign assets converted into dollars offer less purchasing power. Further, unstable political regimes may pass extreme legislation that can cause investor panic.

References

• Investopedia: Global Fund
• Invstopedia: Foreign Exchange Risk
• SEC: Beginners' Guide to Asset Allocation

Resources

• SEC: Check Out Brokers and Investment Advisers
• Investopedia: Exchange-Traded Fund