RANI JARKAS

The Benefits And Risks Of Global Investment

International investing is now essential for our portfolios as we engage in the global growth narrative. Incorporating global equities into one’s investment portfolio offers diversification benefits and the potential for enhanced returns. Global investing has both pros and cons. In this essay, we will examine several notable examples. Advantages of international investment include: Diversification is a key advantage of global investing, evident and significant. 

A varied portfolio offers resilience in times of market volatility. When investments are geographically diversified, their interconnection is minimal. This suggests that the volatility of one market is unlikely to have an impact on your other investments. Many US-listed companies possess assets on a global scale. Approximately 40% of the revenues generated by companies listed in the S&P 500 originate from international sources. One can construct a globally diversified portfolio.

Global investing offers a range of diverse investment opportunities that are not accessible within domestic markets. Numerous prominent technology corporations are situated in inaccessible developed nations. You can choose a theme or multiple industries in Hong Kong. One might have a preference for the technology market, engineering in Europe, and commodities in Australia, for example. There are many options available for individuals interested in healthcare or pharmaceuticals. ETFs offer investors the opportunity to gain exposure to a wide range of geographical regions. One can invest in German stocks through the US-listed EWG ETF and in the Brazilian market through the EWZ ETF.

Investment security encompasses safeguarding investments from fraud and liquidation, which is a significant benefit of global investing. Companies in developed markets are subject to strict regulations that promote good corporate governance and impose harsh penalties for market abuse. This measure protects regular investors from potential losses due to fraudulent activities and insider trading. Capital is perpetually at risk, however, various global financial institutions provide insurance coverage to safeguard against potential seizures and other hazards, including broker-dealer dissolution. In the US, SIPC safeguards investments up to HKD 500,000 in the event of broker-dealer liquidation.

The Concept Of The Diversity Of Money Supply 

Foreign investments expose you to the potential risk of currency appreciation or depreciation. The USD has experienced an average appreciation of 3-5% against the INR in recent years. The long-term depreciation of emerging market currencies is evident. The mean interest rate for domestic savings accounts typically ranges from 3% to 4%. Global investments have historically yielded positive outcomes due to the combination of market growth and currency appreciation. Risks of Global Investing: The benefits of global investment are self-evident. However, it is imperative to acknowledge the inherent perils. When engaging in international investments, it is crucial to acknowledge three potential risks.

High transaction fees pose a significant obstacle to investing in global assets, as they differ depending on the foreign market of interest. Winvesta provides a zero-commission brokerage service for markets, surpassing the cost of domestic investing. Access to alternative marketplaces may be less cost-effective. In addition to brokerage commissions, it is important to consider additional fees such as FX conversion charges, transfer fees, and annual maintenance fees. Exchange rate volatility refers to the fluctuation in the value of a currency when converting rupees to a foreign currency for direct investment in international markets. Suppose you possess a foreign stock that you retain for a year prior to its sale.

Subsequently, one proceeds to perform the conversion of the foreign currency. The outcome of your return can be influenced by the movement of the domestic currency. Political risk assessment is crucial prior to making investments, necessitating an evaluation of the country’s geopolitical climate. Political events impact domestic markets and can lead to market fluctuations. Government and policy actions in developing economies can adversely affect even the most esteemed businesses.

Global Investment

Involves investing in assets from various countries worldwide. Charles Schwab asserts that global allocation is crucial in asset management as it provides diversification advantages. Furthermore, it aids investors in strategically aligning their portfolios for sustained profitability. Morgan Stanley suggests that diversifying across different regions can help reduce negative risk, as the performance of international companies has historically been variable.

Global investments offer multiple opportunities for investors to access assets worldwide. A mutual fund’s portfolio comprises selected holdings in combination. US-registered mutual funds can invest in foreign securities. The following are examples of mutual fund types:

• Global funds primarily investing in companies.

• International investment funds that allocate capital to non-U.S. companies.

• Regional or country funds are investment vehicles that primarily allocate their capital to a specific geographic region or country.

• International index funds are investment vehicles that mirror the performance of international indices or foreign markets.

US-registered mutual funds include diverse international investments. When an investor buys a US-registered mutual fund, they are acquiring a portion of the securities, thereby enhancing diversification. Achieving such a high degree of diversity through the inclusion of individual stocks and bonds poses significant challenges in terms of expense, complexity, and time commitment for investors.

Most ETFs follow an index that monitors a specific market segment. It is crucial to acknowledge that ETFs serve as a vessel for investments. ETF investors are exposed to the underlying investment. Registered ETFs are capable of tracking overseas markets despite being traded on stock exchanges. 

These investments may provide comparable benefits to US-registered mutual funds. Engage in the trading of international equities. Instead of employing American Depository Receipts (ADRs), Canadian stocks are listed on various domestic and international markets.

What Are The Benefits Of Investing In Foreign Markets

Investors may opt for global investments despite their perceived complexity due to several factors. Diversification can be achieved by including international assets in one’s investment portfolio. Investors often feel inclined to invest in familiar industries or companies they personally favor. However, consolidating all their resources into a single entity may subject them to potential vulnerabilities. 

Investing inherently involves risk, and there is no foolproof protection against potential losses. Diversifying assets across international and local equities can reduce an investor’s risk by spreading their funds across regions that are less likely to respond in the same way to a given event.

Global Expansion: Investors seek international investment opportunities for potential growth. Investment data poses challenges in terms of collection and analysis, yet it holds significant potential for development.

Risks Associated With International Investment

Choosing an investment necessitates meticulous analysis, akin to any other financial decision. However, it is crucial to acknowledge several specific global investment risks and concerns before engaging in any international investment. Currency and liquidity risks are significant concerns. Currency risk, also known as exchange-rate risk, refers to the potential for financial loss due to fluctuations in exchange rates. It arises from the disparities in currency valuations. 

Besides the currency exchange rate risk, some countries may impose restrictions on the outflow of funds from specific international ventures. Some countries may impose limitations on the amount or nature of foreign investments that can be acquired. This may hinder investors’ liquidity in trading these assets.

Nations undergoing transitions, conflicts, or economic instability can face adverse economic consequences, impacting businesses within their borders. In our current era, the rapid pace of news updates presents a challenge in staying informed due to the sheer volume of simultaneous events. Foreign investments can sometimes incur higher costs compared to domestic investments. This is due to potential foreign taxes on profits earned abroad, along with transaction fees, broker charges, and currency conversions.

Restricted Access To Information

Different countries have different requirements for overseas companies to disclose information, which may differ from the requirements in Hong Kong. Additionally, disclosure frequency, criteria, and information substance may vary from that of the United States. This empowers investors to make informed investment choices regarding specific assets.

Prioritize Investment Risk Prior To Constructing A Portfolio

Risks are an inherent aspect of existence. The pursuit of growth, development, and improvement is hindered without the willingness to take risks. The pursuit of excellence often requires embracing risk, as what is considered safe may not always lead to the greatest outcomes. Merrill posits that investments with elevated risk levels offer the possibility of greater returns, yet they also entail a heightened risk of loss.

Transitioning into a global investor. Investing in global assets can help reduce risk exposure amidst the ever-changing political, economic, and social environment. Including mutual funds and ETFs in a portfolio can be a beneficial starting point for aspiring global investors. 

Hong Kong equities offer a relatively accessible starting point for inexperienced investors. However, choosing an initial investment can be daunting. The SoFi team is ready to address any inquiries about automatic and active investment instruments. SoFi is capable of meeting diverse financial needs by virtue of its fee-free structure and diverse investment options.