I am large believer in holding international assets as part of my asset allocation in my dividend portfolio. However, like all assets international equities are not the ticket to wealth on their own and must be part of a larger portfolio strategy. All assets carry risks that can impact results, and international holdings are no different. In an article provided by the SEC from some time ago, they list seven additional risks that investors need to be cautious of when considering international investments.
1. Changes in currency exchange rates - when changes occur between currencies, it can impact your investments dramatically. Canadian investors saw that extensively with their U.S. holdings in the past year.
2. Dramatic changes in market value - foreign markets, like all markets, can experience dramatic changes in market value.
3. Political, economic and social events - it is difficult for investors to understand all the political, economic, and social factors that influence foreign markets.
4. Lack of liquidity - oreign markets may have lower trading volumes and fewer listed companies. They may only be open a few hours a day. Some countries restrict the amount or type of stocks that foreign investors may purchase. You may have to pay premium prices to buy a foreign security and have difficulty finding a buyer when you want to sell.
5. Less information - many foreign companies do not provide investors with the same type of information as U.S. public companies. It may be difficult to locate up-to-date information, and the information the company publishes my not be in English.
6. Reliance on foreign legal remedies - If you have a problem with your investment, you may not be able to sue the company in the United States. Even if you sue successfully in a U.S. court, you may not be able to collect on a U.S. judgment against a foreign company. You may have to rely on whatever legal remedies are available in the company’s home country.
7. Different market operations - Foreign markets often operate differently from the major U.S. trading markets.
Some of these risks may not be as intense if you are a Canadian investing in the U.K. for example. However, if you are a Canadian investing in a South America, then some of these risks may become more prevalent. That is why, with all these added risks, my view is that it is better to use a low fee index fund or ETF that invests in a broad international geography as opposed to regional index funds. This will help to spread out your risk and expose you to a higher number of international opportunities.
This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.
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