The financial markets make it possible for everyone to invest all over the world. But most investors’ preferred market to invest in their own market. In this post, we will discuss why that is unwise, and why you should invest abroad.
- Reasons for Investing Abroad
- How To Invest Abroad
- Investing Abroad for those living in the United States
Before we begin, I would like to mention that although I will argue the case for why you should invest abroad, you should not take this post as investment advice. This post is intended for information purposes only.
At the same time, this post is not about your particular domestic market having worse prospects than other markets. You may be located anywhere in the world. This suggestion is applicable to anyone.
We will use the financial markets as the place where we would invest. This means investing in stocks, treasury bonds, corporate bonds, global commodities, and even cryptocurrencies. In all these cases, I would build the case for why you should invest abroad.
The two asset classes where investing domestically can give you an advantage are direct real estate and direct businesses. This is because you may have firsthand knowledge and experience about your local market and want to leverage that.
Nevertheless, if you own real estate and businesses in your home country, the arguments why you should invest abroad are even stronger.
Reasons for Investing Abroad
The main reason why you should invest abroad is risk management. If you live in a particular country, be it the United Kingdom, the United States, or Spain, a big portion of your future finances is dependent on the US, UK, or Spanish economy, respectively.
Whether we like it or not, our standard of living is always impacted by variables that are beyond our control: GDP growth, recessions, taxes, regulation, emerging sectors, declining sectors, new competition, interest rates, currency movements, commodity prices, energy policy, geopolitical risks, etc.
Some things can go well, while some other things go wrong. Though we can make guesses, we simply do not know what is going to happen. And bear in mind that a variable may be performing poorly in our domestic country, while it is performing well in another country.
We live in a complex world. You do not have to be an expert on the world economy to understand and leverage that knowledge. Being aware of that complexity and knowing the concept of risk management will allow you to comfortably invest abroad.
Consequently, if you live and work in a certain country, for example Germany, your job, local business, home, local real estate investments, savings, as well as the wellbeing of your family are all likely to be dependent on the German economy.
When it comes to investing in the stock market, it would be wise to invest abroad and not in Germany. Is Germany the country in the world with the most promising future? Perhaps, or perhaps not. This is not about favoring one country over another. It is about risk management.
If so many areas of your life depend on the German economy and government, owning financial assets abroad makes a lot of sense. There may be a recession in Germany while the economy is booming in India or the United States. Note that the opposite would be true for those living in India or the United States.
How To Invest Abroad
If by now you are already thinking that it makes sense to invest abroad but do not know where to start, you can do it from a brokerage account. If you do not have one, simply look for a reputable broker with good access to financial markets and moderate commissions.
Once you have your brokerage account up and running, and you have funded it, you can start investing abroad.
There are two main ways to invest in foreign financial markets.
On the one hand, we can look for individual securities like stocks and bonds. For example, if you live in Switzerland, you can research companies like Apple, Google, Unilever, Petrobras or Sony. You can also invest in individual US Treasury bonds.
Alternatively, you can look for exchange-traded funds (ETF) that allow us to invest in a basket of stocks or bonds by simply buying one security. For example, we can look for ETFs tracking the US stock market, the Chinese stock market, or even the Polish stock market.
But ETFs also make it possible for us to invest in multiple currencies and countries by simply buying one asset. There are ETFs tracking Pan-European stock indices like the Stoxx 600, or global indices with which we can invest globally. One example would of such global index is the MSCI ACWI which combines both developed and emerging countries.
Investing in commodities, precious metals or cryptocurrencies is another way to diversify our investments away from our domestic economy. This is because all these markets are global in nature.
Investing Abroad for those living in the United States
Finally, we should be aware that the United States is not only the largest economy in the world but is by far the largest financial market. About half of the global stock market capitalization is in the United States.
Therefore, some readers from the US may be wondering if this advice about investing abroad also applies to them. It does, but with a caveat. Whereas someone residing in Europe, Japan, China, South America, or any other country can afford to completely ignore its own domestic financial market, and it would probably be prudent to do so, such decision is more costly for US investors because they would be neglecting more than half of the world’s investment opportunities.
This is why for US investors it would make sense to invest abroad but also domestically. Remember that the idea is not only to maximize returns, but to risk manage our financial life.
While it makes sense to for example invest in the US stock market, owning assets abroad will add diversification to your financial life, allow you to profit from growth opportunities abroad, and make your financial situation and standard of living a lot more robust.
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And if you would like to learn about ETFs and investing in other countries, check out this section:
Funds and ETF