Is it worth investing outside your home country given the risk? Should you hedge currency risk? What is the impact of Chinese “A” share listed companies being added to emerging market indices.
In this episode you’ll learn:
- What are the risks of investing outside your home country.
- What is the main reason to invest internationally.
- How have valuations of stocks have changed since 1993.
- Why U.S. investors should consider hedging currency risk but Canadian investors should not.
- Should we be worried about Chinese “A” shares being added to emerging market indices.
Show Notes
John Bogle says investors don’t need to own international stocks – Investment News
Strong and Stable, Valuations Edition – Macro Man
Asset Allocation Interactive – Research Affiliates
Chinese shares to transform emerging markets – Financial Times
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Episode Summary
Should you be investing internationally? What are the benefits to having foreign stocks in your portfolio? Do the currency risks outweigh potential returns? On this episode of Money For the Rest of Us David considers these questions and more. Comparing different markets, understanding expected stock return projections, the benefits of hedging international stocks, and more are covered on this insightful episode – be sure to listen!
Why would anyone WANT to pursue investing internationally?
Many investors focus solely on domestic markets. Why? Because it’s familiar! They know historical market patterns and there’s no currency risk. Why then should you consider investing internationally? There’s one main reason – because your returns could be higher! To hear why investors are branching out into foreign markets, and some considerations you need to understand before taking the leap, be sure to listen to this episode.
This is why you can’t simply compare one country’s market to the next
When comparing international markets it’s essential to remember that you have to understand their differences in terms of sectors. For example, the US market is comprised of 26% tech stocks, while the world ex-US contains only 6.5% tech. The tech sector and its percentages in varying global markets is only one example why comparisons cannot be made simply. If you adjust your research to accommodate varying sector percentages, you can start to get an idea of which markets are more expensive than others – but these numbers are never set in stone.
Should you invest in hedged international stocks?
If you choose to invest internationally, should you hedge those investments? Hedging international investments can remove the currency exchange risk. Many investors find success in partially hedging their portfolios. It can reduce the amount of volatility associated with currency rate swings. However, in some market conditions, it can actually reduce your returns. For more information on the pros and cons of hedging while investing internationally, be sure to listen to this episode of Money For the Rest of Us.
Yes, there is risk in investing internationally – but there is opportunity as well!
No matter how much research you do before investing, there will always be risks involved. Any investing market, domestic or international, carries currency, political, and human factor risks. Just because one market has dominated in the past does NOT mean it will continue to prosper. No matter in which markets you choose to invest, always remember that diversification is key, timing is everything, and risk management is essential.
Episode Chronology
[0:45] Should you even bother owning international stocks?[3:50] The importance of questioning our underlying assumptions
[8:24] There’s only one reason why you should invest outside of the US market
[9:06] How investing internationally affects the 3 drivers of asset class performance
[11:57] This is why you can’t just simply compare countries’ markets
[14:08] Expectations for stock returns over the next decade
[19:24] The importance of currency exchanges when investing internationally
