What are your thoughts on Thanksgiving food?
(Investing in Foreign Markets)
November 20, 2020 by The Q.ai Team
The educational portion of this newsletter focuses on international investing
Welcome to the week before Thanksgiving, a time when many of us focus on getting our work done this week so we can focus on eating copious amounts of food next week. Depending on who you ask, some people might say that they detest Thanksgiving food. Some of us over here at Q.ai might share that sentiment, but we’re not naming names.
This Week’s Biggest Headlines
- Coloradans can now get In-N-Out without leaving the state. The first two of nine planned In-N-Out locations are opening today in Colorado Springs and Aurora. If you’re thinking there’s going to be an In-N-Out in every state, we hate being the bearer of bad news. The CEO isn’t interested in opening up a location that is beyond a day’s worth of driving from its warehouse. In other words, not in our lifetime. Read more.
- We now have two vaccines that are way more legit than the flu vaccine.Here’s a quick recap: earlier this week, Moderna boasts its vaccine is 94.5% effective, stealing the spotlight from Pfizer’s impressive 90% efficacy. Pfizer comes back, saying its number is actually higher – it’s more like 95%. Moderna responds “serve returned” and both companies high-five because both vaccines are way better than the flu vaccine, which at best is 60% effective. The last bit probably didn’t happen, but let’s focus on the good news here: some of us could get a vaccine as soon as December! Read more.
- The rumors are true – after a multi-year hiatus, a massive comeback tour is expected from our friends at Radio Shack. We can all thank Netflix for reviving beloved shows that went off-air years ago. Now, we can give Retail Ecommerce Ventures (REV) props for rescuing Radio Shack from its path to oblivion. REV is known for picking up struggling – albeit well-known – brands that were unsuccessful at transitioning to e-commerce. The company has plans to bring the electronics company to its fullest potential by updating its online presence for more digitally-minded shoppers. The original investors are also keen on this acquisition and are sticking around. Read more.
- Boeing’s 737 Max is returning to the skies after spending nearly 2 years grounded. Boeing has had a horrible 2020, but an even worse 2019 after several crashes of the 737 Max plane cost the lives of hundreds. The company was saddled with billions of dollars of damages and order cancellations – all before COVID hit. Boeing had to cut 19% of its workforce and is still operating at a loss. Even after the FAA declared the 737 Max planes are safe to fly again, the stock is still incredibly cheap despite it rising 41% this month. Read more.
- Robninhood looks to enter the foray of recent tech companies to IPO. Its intuitive and easy-to-use app has become highly popular with millennials and Gen Z investors and has even forced business model changes with major brokerages by offering zero-fee trading. The path hasn’t been perfect for Robinhood. It has faced lawsuits, hacks and unprecedented market crashes. Very soon, investors might be able to buy fractional shares of Robinhood’s stock using the Robinhood app. Meta. Read more.
- In other news regarding Space Karen, Tesla will join the S&P 500 on December 21. From a stock split to yesterday’s all-time high of 508.61 per share, Tesla has been flirting with the idea of joining the S&P 500 index for quite some time – and now it’s official. The stock is up more than 490% this year so far. Read more.
- Epic Games is not chill with being charged commission fees for in-app purchases. It would also like Google and Apple to have a word with their lawyers about it. This months-long feud has create a lot of awareness about the business practices of both tech giants. It might even force the companies to change it policies, especially before federal regulators get involved. Read more.
- JFK opens up a COVID testing center at JetBlue’s Terminal 5. JetBlue has partnered with the Port Authority of New York and New Jersey and will test any passenger and airline employee for the next six months. On select flights, passengers will be given COVID test kits that can be self-administered 72 hours prior to their return dates. This will help make it easier for New Yorkers to bypass the mandatory 14-day quarantine. Travel has been a major area of concern for many and this only hints at what can be expected from airlines that aren’t selling middle seats for the remainder of the year but plan to at the start of 2021. Read more.
Let’s not forget “the usual”
- Unemployment headlines weren’t about whether initial claims have increased or decreased, although it did increase from the week before by 31,000. It instead highlighted that the CARES Act is set of expire on December 26, effecting 7.3 million workers from receiving unemployment benefits and an additional 4.6 million workers being dropped from the Pandemic Emergency Unemployment Compensation (PEUC) benefits. This is scary for many who reply on the additional $200 to $300 a week to keep the lights on. Read more.
- It’s starting to look like only one type of stimulus package will pass this year (if any). A far cry from the trillion dollar packages that have been proposed by Congress, the targeted package currently on the table will focus on industries that have been hit the hardest, including travel, restaurants and hospitality. Read more.
- COVID has increased to a daily high of 185,759 infections. States are imposing curfews and Thanksgiving travel is being discouraged as the CDC forecasts the death toll reaching between 276,000 and 298,000 by December 12. Scary. Read more.
How to tackle investing in foreign markets
International investments are the investments we make in foreign companies and governments on foreign exchanges. These can include stocks, bonds, and ETFs, as well as riskier investments like currency options and futures.
By broadening your reach to other countries, you diversify your portfolio and balance out some of the risks of only investing domestically. However, as a result, you also assume some of the risks that come with international investments, such as changes in exchange rates, geopolitical events, and international interest rates.
International investments are the securities that you purchase across international borders. Just like domestic investments, these may take a variety of forms, from government debt (bonds) to stocks and ETFs. And, just like domestic investments, the goal is to capitalize on the growth potential of your assets.
What is International Investing?
Many financial experts advocate investing in international securities as a way to diversify your portfolio and mitigate domestic losses. However, that doesn’t mean these investments are without risk themselves.
There are two main types of international investments:
- Foreign Direct Investments (FDIs): physical purchases made within another country’s borders, typically by corporations. Examples of these investments include opening a factory or purchasing equipment.
- Foreign Indirect Investments: also known as Foreign Portfolio Investments or FPIs, are stakes purchased off a foreign country’s stock exchange. These often take the form of stocks, bonds, or ETFs.
We’re going to focus on the latter, as individuals are more likely to invest in FPIs.
Types of International Investments
Investing in foreign securities is similar to putting your money in your home country’s market. Depending on the country, you usually have access to the same options offered on domestic exchanges. Seasoned investors also invest in international currencies and options.
Just the the U.S., government bonds and notes are offered, as countries may issue debt to avoid raising taxes or to raise funds for new projects. These investments come with differing interest rates and maturities, depending on where you invest.
If you’re looking to invest in international fixed income securities, it’s a good idea to gauge the government’s risk first. There are plenty of free online tools that that calculate each country’s credit market rating, such as this one from Trading Economics.
If you’re more interested in foreign equities – who isn’t? – there is a long list of international indexes to help you get started. All-country indexes compile stocks from around the world to give you a comprehensive list of options.
You can also go with an index that caters to specific market classifications, such as developed markets and emerging and frontier markets.
Why should investors add foreign securities to their portfolio?
By adding foreign stocks, bonds, and ETFs to your portfolio, you spread your risk and mitigate your losses in the event of an economy-wide collapse (March of 2020, anyone?).
It’s not just about mitigating your losses, either. If you don’t diversify across economies, you’re guaranteed to miss out on global market rallies when they occur. Just because the NYSE is down doesn’t mean the LSE (London Stock Exchange) is, too – and vice versa.
Additionally, many emerging and frontier markets offer greater potential for growth than developed economies. While they often come with enormous risks, their push to become a thriving economy means that early investors can see huge profits in return.
How much does it cost to invest internationally?
Your international investment costs will vary based on the securities you purchase as well as your choice of broker. In some cases, the country of origin may play a part in your final costs, too.
Investing Fees: Similar to the U.S., investing fees will vary based on the securities you choose, as well as your broker or investment firm. You may also be charged additional fees for safekeeping and management services.
Taxes: Each country has different tax laws – some may impose no capital gains taxes at all or waive the cost for foreigners. Others may require non-resident investors to pay up to 25% (or more) on any profits.
Fortunately, the U.S. tax code offers a foreign tax credit to adventurous investors. This credit allows you to list some of your foreign taxes as a write-off on your capital gains income.
What are the Risks of International Investing?
It’s essential to do your homework when it comes to international investments to minimize potential risks.
For instance, many foreign markets have different – or no – regulations on the flow of information between corporations and stakeholders. And, even if the company or country does provide you adequate data, there’s no guarantee that it will be in English.
Foreign exchange risk
- Currency exchange rates will fluctuate in the long-term, meaning that even though your investment is doing well, the currency exchange rate is not
- Some countries also enact “currency controls,” barring you from moving currencies across borders
- Times of civil unrest, violence and military action are not only detrimental to the well-being of its citizens; they also tank the economy
- For investors with capital moving in the region, this can spell enormous financial losses
Other risks to consider:
- Higher investing costs
- Limited liquidity due to smaller trade volumes, fewer listings, time differences, or restrictions on foreign investments
- Changes in foreign interest rates
- Limited or no access to legal remedies in cases of fraud or wrongdoing
How to get started with international investments
1. ADRs – American Depositary Receipt’s are equal in value to the number of shares listed is offered as a way to purchase foreign companies that trade in U.S. markets
2. U.S. Registered Funds – These mutual funds and ETFs are another popular way to gain international exposure on U.S. soil. These funds strive to provide diversification while staying subject to U.S. regulations, which gives investors more control over their investment.
3. Companies on U.S. Exchanges – Some foreign companies trade directly on U.S. stock exchanges. The benefit of this practice is that these companies are subject to many of the same SEC regulations as domestic stocks, which limits their risk.
4. Foreign Markets – The most obvious and riskiest methods to trade in foreign investments as there isn’t a requirement to file any reports with the SEC (which is intended to protect investors from shady dealings)
To get started in foreign markets, you can invest with a U.S. broker who trades in foreign securities or go through a foreign broker.
The Bottom Line
This type of investment is a very popular way to diversify your portfolio even further by expanding your focus beyond U.S. markets. There are many risks and every country has different rules, so it’s important to do your due diligence beforehand.
You should familiarize yourself with:
- The issuing corporation or fund
- Underlying securities within a fund
- Foreign tax structures
- Political or military instability in the area
- Relevant economic regulations
Burton Malkiel explains in his book, A Random Walk Down Wall Street, how investors all need to start somewhere. He unpacks much of the financial jargon that litters the world of investing to help beginner investors get on their feet and enlightens readers on making better market predictions. He also reveals some common mistakes investors should avoid and shares several long-term investment strategies that are based on various stages in life.