Advantages of Investing your Money Globally
Investors in the United States are blessed with a number of advantages. Liquid equity markets, a large number of listed companies and comprehensive disclosure combine to make the US equity markets exceptionally attractive. However, that attractiveness inevitably leads to lower returns for investors because of the overall efficiency of the market.
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Provides an authoritative and classic treatment in the field of international investments, with a clear exposition of theory and recent empirical research. |
International InvestmentsIn contrast, international markets offer greater opportunities simply because they are smaller and not as widely pursued. For an investor willing to dig a little deeper into an investment, international investments can be a goldmine. But investing abroad can still offer substantial benefits for the investor who prefers leaving the heavy analytical lifting to a mutual fund.
The first and most obvious advantage of international investing is diversification. Other economies, be they in Western Europe, Russia, or Southeast Asia, will have a different set of economic circumstances than the United States at any given point in time. If the United States falls into a recession, Ukranian or Chinese equities may nevertheless be roaring along. A broadly invested portfolio will not be as adversely affected by negative movements in any one of its component companies or countries.
An internationally invested portfolio also allows an investor to capitalize on the higher growth rates available in developing economies. Many developing economies in Europe and Asia are currently growing much faster than the United States as they "catch up" to more developed countries. Companies operating in these countries have a built-in growth advantage. They have the "wind at their backs" - a growing economy will increase most business' revenues without any increase market share.
International companies are often significantly cheaper than US companies. This means that the same dollar of capital invested will often return substantially more in operating earnings and earnings per share than a comparable company in a comparable industry in the US. The price discount reflects the risks of investing abroad, but there is often also a discount for illiquid or hard-to-understand investments. This discount compensates investors for the increased research and complexity involved in international investments.
Finally, international investments can offer quite a few psychological advantages. Investing abroad means putting capital where it is most needed. Particularly for developing countries, foreign investment allows the kind of accelerated growth that lifts people and countries out of poverty. Furthermore, ownership of international investments will encourage you to keep up on current events in that country and make you into a more informed global citizen.
The exact nature of the company and country you are investing in will affect the balance of these advantages. Investing in developed western European nations is a good diversification strategy, for example, but you may not enjoy the higher-than-usual growth rates of investing in a developing country. Likewise, less developed countries frequently offer high discounts in relation to their US competitors, but the increased volatility of these investments will make them less useful as a diversification strategy.
The potentially high rewards of investing internationally are balanced by risks. These risks vary by country, but there are a few common threads. International companies frequently offer less disclosure. A company's website, investor information and news may not be available in English, which makes it difficult to keep tabs on portfolio companies. Investors also face currency risk - for example, if the dollar is appreciating strongly it may be difficult for your overseas investments to keep up. Finally, legal issues and country issues are always a concern in developing countries, as these countries may enact regulatory, tax or ownership laws that adversely impact investors.
However, there is indisputably money to be made abroad, and smart money will follow the opportunity. After weighing advantages and disadvantages, informed investors can frequently buy a very profitable stake in the global economy.
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