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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Wednesday, September 06, 2006

The Risks of International Investing

You can never completely rid yourself of risk in your portfolio, but diversification will help you sleep at night. Investing internationally will help your risk/return trade-off, but foreign investments have some risks the domestic stocks do not.

  1. Currency Risk: Changes in foreign currency rates can effects the returns of foreign investments. Exchange rates change constantly because of supply and demand of countries' currency. Also, when you sell a foreign security or receive dividends there needs to be a currency conversion. Change in foreign currency rates can increase or decrease the dollar value of an investment even if the foreign security remains unchanged.
  2. Economic/Political Risk: Economies around the world do not possess the diversity or stableness of the U.S. Political unrest can have major negative results on foreign investments' returns. So understand the politics of the country before diving in.
  3. Market Liquidity Risk: This risk is if a security becomes difficult to sell in a secondary market. Most foreign stock do not trade in the volumes that U.S. stocks tarde.
  4. Differences in Accounting Standards: With all the accounting malfaesance that has gone on in the U.S. this decade it is easy to see how a country's accounting rules can significantly affect a stock. Most standards are quite different from the U.S. model.
  5. Costs of Investing Internationally: For all the reasons we discussed, investing in foreign markets typically has higher expenses than domestic. Obviously, this can reduce your overall return.

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