Is it a good idea to invest a portion of your nest egg in foreign stocks? Conventional wisdom says it is. International holdings might be alluring, too. Imagine exotic annual reports issued by Yurt Retirement Villages of Mongolia (ticker: YURTS) or the Uzbekistan Cotton Barn (ticker: PICKN). Global investing might even seem prudent, after a period when the American stock market has risen significantly.
But think again. There are compelling reasons to steer clear of foreign stocks. For starters, the United States is one of the most demanding countries in terms of the information that publicly traded companies are required to disclose. Corporate America isn't sending you annual reports and quarterly financial statements from the goodness of its heart. The Securities and Exchange Commission (SEC) requires public companies to do it.
Consider also that most countries aren't as economically or politically stable as America is. It would be a shame to invest in a promising Freedonian company, only to see Freedonia erupt in a nasty and lengthy civil war. Currency risk is another issue. To profit with foreign stocks, you need not only appreciating securities, but also favorable currency exchange rates. Your Freedonian stock might have gone up 10%, but if the Freedonian flurgle has dropped 20% against the American dollar, you lose. And remember that if the American economy tanks, the rest of the world's markets will likely be hit, too. So "diversifying" by purchasing stock in overseas companies doesn't necessarily offer that much protection.
There's good news, though. You can invest internationally without leaving home. Many American companies generate a large chunk of their sales overseas. By buying shares of these firms, you can benefit from the growth in emerging economies and also diversify your portfolio. Many American companies generate more than half of their revenues internationally. These American companies routinely generate more than 50% of their revenues outside the United States: ExxonMobil (NYSE:XOM), Dole Food, IBM (NYSE:IBM), Gillette (NYSE:G), Motorola (NYSE:MOT), Eastman Kodak (NYSE:EK), Coca-Cola (NYSE:KO), and Tupperware (NYSE:TUP). Tupperware generates more than 75% of its sales abroad. Investments in these kinds of companies do expose you to some currency risk, but most global companies take steps to minimize it.
Investing directly in emerging markets does offer rewards, but it's at considerable risk in many cases, given the lower regulatory standards and the challenge of digging up information. So when you have a yen for foreign companies, consider large American companies with substantial foreign operations. Investing directly in international stocks is less problematic if you happen to be extremely familiar with a particular foreign company and the country it operates in.
Here are some Fool articles on international investing:
- Is It Time to Invest Abroad?
- The Challenges of International Investing
- Dangers of International Investing
- The Economics of Globalization
Learn more about investing in companies in our Investing Basics area. You can also learn all about brokerages and find one that's right for you in our Broker Center.
