International investing makes a lot of sense for many investors. If nothing else, diversification may be a good enough reason alone to consider international investments as you’re looking for different portfolio management strategies. However, with every benefit of international investing comes a certain level of risk, and those risks vary among different countries. An investor has to look at both the positives and negatives of any given international investment to determine the right fit for their portfolio. Here are some of the risks and benefits of global investments to consider before jumping in.
Global Investment Risks To Consider
The main three global investment risks to consider include political risk, currency risk and risk regarding interest rates. All three of these risks should be monitored closely at all times, but political risk is particularly important as the political situation of any country can change rapidly. Scandals, corruption, nationalization and many other political issues can cause an investor to be blindsided and essentially lose money overnight.
With currency risk, a country’s currency value is usually compared to the United States dollar. This is why only looking at an international company’s growth can be dangerous for an investor. No matter how much a particular company grows, the growth isn’t going to seem as valuable if the currency exchange rate is low compared to the U.S. dollar.
When it comes to interest rates, sometimes emerging countries will raise them to keep inflation under control in situations where an economy’s growth is happening too rapidly. This could hurt financial assets if the prices of those assets are based on the associated interest rates.
How To Measure Global Investment Risks
Measuring global investment risks can be the trickiest part of international investing. Many investors choose quantitative approaches to measure risk, while others prefer qualitative approaches. Everyone has specific strategies and approaches, but the most effective investment risk measurements usually involve a combination of quantitative and qualitative assessments. Using the Sharpe Ratio to measure risk-adjusted returns as well as evaluations of credit ratings for a specific country is an example of using both risk measurements.
Carefully Measure The Benefits For Your Portfolio
Diversification is important for every portfolio management strategy, so international investing is worth a close look in that regard. Every investor has a different risk tolerance, so some may feel comfortable with putting 50% of their investments into international markets, while others only want 20%. In many ways, the three international investing risks could be beneficial if a country has a strong political force, great currency value and reasonable interest rates. Of course, these could change at any time so an investor needs to allocate their investments per their overall risk tolerance.
Stock Investing Info can help investors look at the positives and negatives of global investments. It’s important to look at both sides to make you feel more comfortable with your investment and reduce any surprises later on. Both short-term and long-term international investments can be beneficial, so contact us today to see if there’s an investment option right for you.