FIN343 Investing internationally for diversification

Sure you can diversify through different assets nationally but you can further it by investing overseas. Some experts say its not recommended to have more than half of your equities in stocks in one single country (Merriman Paul). Although other experts would say there is enough international exposure in American owned companies as it is. Another reason to invest internationally is for the simple reason that sometimes the performance is better. There will undoubtedly be down times in our economy and it can be beneficial to have investments outside of our economy. A third reason is because international exposure gives us a larger variety of opportunities. By only investing nationally we could be potentially missing out on all sorts of great returns. Just as there are many great reasons to invest internationally there are also quite a few reasons to be cautious about it. Foreign exchange risk is one big problem. This occurs when the values between the currency in your home country and the country you have investments in take an unfavorable turn resulting in a loss of money. Another reason people may be hesitant to invest internationally is because of tax implications. International investments are taxed differently than national ones and there can even be additional taxes imposed on international investors. A third reason to be cautious when investing internationally is because of a lack of transparency. Not all countries hold the same standards as us when it comes to reporting and regulations and this can be a reason for concern. Reference Merriman Paul. (April 22 2015). “Six reasons you should invest internationally”. https://www.marketwatch.com/story/six-reasons-you-should-invest-internationally-2015-04-22. R2 When you invest outside of your home country there are several reasons why it is a good and not-so-good idea. Regardless there are several opportunities with offshore companies on which you can capitalize. Some of the advantages of international investing are: Although there are several lucrative pros to offshore investing there are cons as well. Some of these include: It is important to note that half of the world’s assets and investments are held in offshore jurisdictions. Additionally it is typical that the benefits of offshore investing outweigh the costs and fees associated with it. Reference Segal T. (Jul 20 2019) Offshore Investing: Pros and Cons. Retrieved from https://www.investopedia.com/investing/pros-cons-foreign-market-investing/ R3 The first reason I think it is good to invest internationally is diversification. If the US markets take a tumble because of uncertainty or another reason it is good to have some assets with ties outside of our country. The next reason I would suggest to invest internationally is a good probability of a better return on your portfolio in the long-run. International stocks compared to US stocks lots of times alternate as to which performs better. With the exposure to international markets the investor could tap into the time periods when they outperform our domestic markets. Finally I would suggest to invest internationally because of the additional exposure of other currencies. This is another risk involved with only having domestic assets that could be resolved with exposure to investments in other countries. The first argument for not investing in foreign stocks would be lack of understanding. We should always know what we are investing in and how it is performing. There may be additional lack of knowledge if that company is not in the same country. As an investor it may be difficult to know how they are currently performing. The second argument would be lack of knowledge with currency differences and currency risk. By converting US dollars to another currency additional risk is being taken on with the introduction of the new currency in your portfolio. The final reason would be different set up with regulations and such. By this I mean that other countries may not require earnings reports and accurate accounting information. There would be different requirements that an investor would need to familiarize themselves with before investing. Merriman P. (2015 April 22). Six reasons you should Invest internationally. Retrieved February 24 2021 from https://www.marketwatch.com/story/six-reasons-you-should-invest-internationally-2015-04-2 R4 Because there is no global currency when doing business internationally we must factor in the exchange rate between the two countrys form of currency. Foreign exchange rate risk can affect both investors and companies. Suppose an American manufacturer wants to purchase a large amount of materials from a Japanese based company. The sale could be agreed upon for a certain price but the transaction might not occur for several months. If the exchange rate fluctuates it could affect the original deal the American manufacturer was getting. The issue is similar when it comes to investors. When an international trade is closed the currency must be exchanged back to the investors home currency. The exchange rate could be unfavorable to the investor and can affect the overall return. Personally when it comes to investing overseas I would certainly factor in the potential for foreign exchange risk. If the exchange rates were going to considerably eat into my return that would be a problem with me. This could create a situation where Im waiting for the exchange rate to become more neutral or back in my favor and I might not want to wait around for that to happen. R5 Foreign exchange rate risk is the risk of financial impact due to exchange rate fluctuations. More simply put foreign exchange rate risk is the risk that a business’ financial performance or financial position will be impacted by changes in the exchange rates between currencies. (Corporate Finance Institute n.d.) There are three types of foreign exchange rate risk: transaction risk economic risk and translation risk. Transaction risk involves time delays. For example if a company in Canada is looking to machinery from China an agreement can be made at a certain exchange rate. However by the time of delivery the exchange rate may have increased or decreased. As far as economic risk goes there can be changes in risk based on exchange rates. For example local furniture makers can face adversity from furniture importers if the local currency unexpectedly strengthens. Last translation risk or risk from a domestic business doing business in a foreign country. The risk comes in to play when the domestic currency is used to rate performance. Exchange rates will not always look the same from country to country. Based on the above information this seems to add another level of risk to foreign investing. Because I’m not much of a risk-taker this would be another deterrent in foreign investing for me. Reference Corporate Finance Institute. (n.d.) What is Foreign Exchange Risk? Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/finance/foreign-exchange-risk/ R6 FForeign exchange rate risk is the risk that is present in any foreign denomination of it losing value. This can occur through inflation or other means. It is very much a risk associated with investing in companies overseas. If I were to invest in a foreign company that uses a different currency and that currency loses value my investment would lose value as well. This is a risk that investors of foreign companies take on when investing. This risk of the denomination losing value is present with our own currency the dollar as well. The dollar usually does a pretty good job at holding its value but some investors like to invest in foreign countries to make sure that not all of their investments are in the same currency. This is a way to diversify in case the dollars value were to plummet. Many people either invest in foreign countries or a commodity like gold to reduce this risk. Ganti A. (2020 December 14). Foreign exchange risk definition. Retrieved February 24 2021 from https://www.investopedia.com/terms/f/foreignexchangerisk.asp Requirements: Detailed | .doc file Tax Benefits – There are several countries known as tax havens. These countries offer incentives for foreign investors such as favorable or non-existent tax rates. When you are a small country but can attract big investors you are increasing economic activity. Asset Protection – When you need to restructure the ownership of your assets offshore locations are popular. For example if you are worried about a lawsuit or a creditor seeking collections you can transfer a portion of your assets overseas. Confidentiality – Offshore investing comes with strict confidentiality regulation – not that offshore investors have anything to hide. But if you are a high-profile investor you don’t need your information being shared. Diversification – The tried-and-true rule of investing – diversification of your portfolio. It’s better not to keep all of your eggs in one basket. You want to spread your money and investing far and wide. This helps in mitigating losses. Regulatory Scrutiny – “In recent years the U.S. government has become increasingly aware of the tax revenue lost to offshore investing and has created more defined and restrictive laws that close tax loopholes.” (Segal 2019) Cost/Minimum Investment – Foreign investments come at a hefty price. Typically the minimum amount which can be invested is around $100000 and can climb upwards of $1 million. Foreign businesses know their offerings are in high demand by the wealthy so they charge accordingly. Fees – Offshore investors typically pay higher investment fees as well. You need to find someone who specializes in offshore investing and that comes with a price. ‘