Should You Invest in Foreign Countries – their Risks and Rewards
One of the biggest advantages of investing in foreign countries is that it diversifies your portfolio, and protects it against risks associated with the economy of a single country. In the aftermath of the 2008 financial crisis, a number of countries such as Greece and Spain have seen a loss of trust in their economies. This type of economic downturn is possible in every country, even in the United States. In such a situation, it is prudent to invest in foreign countries to diversify your portfolio. Therefore, diversification is a valuable reward for investing in foreign countries.
Another advantage of investing in foreign countries is that it opens up more options for you. If you were restricted to just 10,000 stocks in USA, you can get more choices to invest in if you invest in stock markets of Europe. Instantly, you can have tens of thousands of more companies to invest in. Among these companies, there must be many that will grow over time, just as American companies would grow in America. By investing in growth stocks from around the world, you can improve your overall returns. If this interests you, I will advise good and up to date currency conversion tools to help you determine exact differences in the currencies you are dealing with.
Risks of Investing in Foreign Countries
Despite the many advantages, there are some real risks associated with investing in foreign markets. Perhaps the most prominent risk is that of geopolitical instability. This is the most basic thing that is noted by any investor before they even consider a country. For example, investing in a company from UK would, on average, be much less riskier than investing in a company from Iraq. The latter country is facing insurgency, and other serious geopolitical events that make it a riskier market to invest in. However, such risks are present in almost every country.
The UK is a very stable country, almost as stable as the USA, however, there still is the imponderable of what may happen if Scotland decides to secede or separate from its union with the rest of the UK. This is a very unlikely event, but it helps to know about all the geopolitical possibilities, so that you can assess their probability and their possible impact on your business. In this case, we must clarify that the odds anything unpredictable happening in UK are close to zero.
Another risk associated with foreign trade is that of changing currency exchange rates. The exchange range for any pair of currencies may change every day, or over longer periods of time. In such a situation, you may find that you are running profits or losses which do not result from your business, but are a direct result of fluctuating exchange rates.
Finally, there is the risk of economic collapse or depression in any country. The USA is the strongest economy in the world, and can be said to face the least amount of risk of defaulting on its loans. However, there are many other smaller countries that can face and succumb to financial turmoil of one kind or another. Investing in such countries can result in unpredictable losses.