Overcoming the Challenges of Investing in Foreign Markets

The world’s richest people invest in businesses around the world because good business can be found anywhere. Even billionaire Warren Buffet recommends diversifying your portfolio with some foreign investments; although, he doesn’t recommend investing in countries with small markets and he has publicly stated he wouldn’t invest in Russia a second time. International investments are challenging, but if you’re prepared you can overcome the challenge and find the endeavor truly fruitful.

Diversity is the Correct Way to Save for Retirement

International investments offer a great way to diversify your portfolio, says international investment expert Kirk Chewning St. Croix. “Avoid putting all of your money in a 401(k) plan or IRA while taking advantage of four other types of investments, which include stocks, bonds, short-term investments, and international investments. Less swings will be experienced for a portfolio that has a number of various investments and can steadily grow over time.”

Considering Chewning’s experience in foreign investing, there’s good reason to follow his sound advice. He’s partner and CEO of a leading management consulting service for clients in the financial services industry. Kirk Chewning of Cane Bay Partners has sound advice for newbies entering the global marketplace: “understand that succeeding in the increasingly competitive global marketplace demands highly refined economies of scale and streamlined business processes.”

The Top 3 Risks

Transactions costs – Transactions costs can look like a big downside in terms of international investments. Even in a globalized market, there’s still fees and commissions that can overprice the investment; however, there’s an upside to fees, or rather a better way of looking at things. Fees may be inclusive of a service, such as a financial advisor, which could be considered a positive extension of the investment, rather than a pure cost (good service, high return, low cost).

Currency risks – Among the most important factors to be analyzed is currency risks. When investing in foreign markets, you absolutely must be aware of what your dollars are worth. Warren Buffett had this to say about the declining US dollar: “We think the dollar, over time, unless policies change in a major way, will likely decline somewhat more against most major [foreign] currencies.”

Liquidity risks – “The risk of not being able to sell your stock quickly enough once a sell order is entered,” says Joseph Nguyen of Investopedia. If you have experience with US stocks, you’ve likely experienced liquidity risks before and are prepared to deal with them. If not, you’ll need prepare yourself for this by looking into the bid-ask spread of the asset over time. And, check the financials of the company to determine if they have a proven track-record of managing their finances.

Financial Statements and International Investments

Through the accurate analysis of financial statements you can see how currency moves in a foreign land depending on factors, such as industry, geography, business segments, etc. Take the time to closely monitor and analyze balance sheets, which will show your assets and liabilities and give you a clearer picture of your liquidity.

The financial statement, from the prospective of an investor, may be a challenging hurdle, but is a fundamental one to face. If so, get help from an accountant or a financial advisor.

Final Thoughts

When investing internationally, there are other difficulties you may face. These include international law, tax procedures, and understanding the culture. You may think a nation’s culture doesn’t factor into your investment, but you wouldn’t want to invest in beef in Hindu cultures where cows are sacred and therefore not slaughtered. It’s important to be culturally aware, so as not to invest in a business or service that won’t be popular.

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Author: Eddy

Eddy is the editorial columnist in Business Fundas, and oversees partner relationships. He posts articles of partners on various topics related to strategy, marketing, supply chain, technology management, social media, e-business, finance, economics and operations management. The articles posted are copyrighted under a Creative Commons unported license 4.0. To contact him, please direct your emails to editor.webposts@gmail.com.