International investing is a great way to spread out the risk on your portfolio while also pursuing growth. Major funds across first world economies invest in developing economies as a way to pursue massive growth in their portfolios.
However there are 5 major risks that every investor need to be aware of before investing in international markets. The 5 major risks involved in international investing is access to reliable information, liquidity, global/societal events, currency exchange rates, and environmental concerns.
The reason why investing overseas is so profitable is because of the small cap nature of the publicly traded companies. Small cap companies in un-developed economies such as parts of Africa, South America, Latin America, and Asia have less competition along with less overhead.
That being said, if you are not aware of the 5 major risks then you can fall victim to losing your entire investment!
Let’s go through all five of them.
Access to Reliable Information
It is very hard to accurately judge how a company in an undeveloped economy is doing by reading a yearly report.
This is because these companies will either falsify their information to attract investors or the investors simply wont understand the company’s business plan itself. As such finding accurate and reliable information on international companies can be extremely hard.
So how do we fix this? Well you need to do a little bit of legwork depending on where the potential investment company is.
If I was to invest in an overseas company in Nigeria I would first look online to find the regulatory stock exchange body for Nigeria. A quick google search returned this site.
After that I would then read through every report the investment company produced. The goal of this is to get an accurate understanding of what exactly the company does.
After I would then call the investment company’s investor relations officer. These people are paid to help you make a proper decision on if their company is a good fit for your portfolio. Always call these guys if you get the chance. If the company has none, ask to speak with a manager or executive.
For larger investors and funds the next step is to actually fly an analyst out to the company in Nigeria. This is so the investor can get a firsthand account of the company and make the final determination.
As we can see, its hard to hold international investments because of the research legwork that is needed to add them to your portfolio correctly.
Ok…so this is a major risk. Without liquidity you are risking losing your entire investment due to nobody wanting to buy or sell the stock.
For example, if you buy 100 shares of an international company who typically has no volume on their ticker then chances are you will have to wait a very long time to liquidate the position.
This is because nobody wants to buy your investment. Because of this it does not matter how good a company is…its still a very bad investment without liquidity.
Even if your investment company cured cancer, if nobody wants to buy it the value of your investment is worthless.
This is why checking liquidity on a potential international investment is so important. If your potential investment company/asset has no liquidity then it always should be ignored until liquidity returns.
So how do we judge liquidity in an international stock? Well look up the potential investment company on the host countries stock exchange.
There you will be able to find the volume of the stock. A high volume stock means their is lots of liquidity and its good.
Global/Societal events can affect your potential investment in a huge way.
Largely its hard to predict these, you can only react against them. When the event takes place you need to be on top of your investment to see how it reacts. Sometimes your investment wont move at all, but other times it will either shoot up or down.
For example, if you invested in coffee farms in Latin America and suddenly coffee is banned by the UN (for whatever reason). Chances are your investment will plummet as coffee exports are worth significantly less. It would be near impossible to predict a global/societal move like this…but if you were on top of your investment you could get out fast enough. Saving yourself from potential catastrophe.
I for one have been financially hurt by crazy events happening before. You cant dwell on it or think of ways you could of avoided it. Sometimes global/societal events just mess with your international investments. Staying informed on what’s going on in your investments home country will save you lots of financial heartache.
Currency Exchange Rates
So this risk often times flies under the radar for investors.
Its a simple one to overlook as the global currency market is relatively stable. That being said sometimes situations occur when your investment is suddenly worth a different value.
This is because your international investment has to be liquidated in the hots country. If you bought shares of an electric vehicle manufacturer in China, on a Chinese exchange, then when you liquidated the shares you would be paid in Chinese Renminbi. This Renminbi could we worth significantly less or more depending on when you liquidate the position.
This is why currency rates are a huge factor in international investments. This risk can sometimes work in your favor but more often then not it wont. However, you can usually see currency inflation/deflation coming down the road so the risk of currency exchange rates can often times be mitigated.
This is an emerging threat to international investing.
20 years ago environmental concerns were not that big in international investing. Now with the world being more connected then ever before (globalism) a hurricane in Latin America can make your coffee more expensive in France.
Environmental concerns are any environmental effect that can alter your investment. This risk differs from global/societal because it is not man made but rather a result of nature.
It is important to understand the climate where your investment is located. It can both benefit your investment as well as hurt it. As such its vital to look into where exactly your potential investment company is located.
Are you investing in a castle ice sculpting business in the Gobi desert? Chances are the climate is going to heavily impact that business going forward.
This risk seems rather simple but you would be surprised how often even professional analysts miss it. It will hurt your investment if overlooked. I just sit back in my chair and think about the climate the business is in.
Investing internationally carries 5 risks. The 5 major risks involved in international investing is access to reliable information, liquidity, global/societal events, currency exchange rates, and environmental concerns.
By knowing these 5 risks you will protect you investment for many years in the future. I’m always investing internationally as their is insane economic growth to be had. You just have to be safe and double check the risks.
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Until we meet again, I wish you the best of luck in your investments!