Should I Invest Internationally?
Maybe. This concept, like most investing concepts, is a very individual thing and is not necessarily the right thing for everyone. The explanation given here is not in any way intended to encourage you to invest internationally, only to understand the idea so that you can properly consider it.
It seems obvious that investing internationally means buying stocks, mutual funds or bonds which are issued by companies not based in the United States, but do you know what those companies are or what they do? We can guess with some names, like China Mobile (CHL), for example, and we might be mostly right, although they may also do some things that would surprise us.
Then there are harder ones, like Diageo (DEO) from the United Kingdom. What do they do? They’ve built themselves up over the years to where they now own brands like Guiness, Moet, Johnnie Walker, Smirnoff, Captain Morgan and Tanquery, among others. They also own Louis Vuitton, the maker of really expensive things for women.
So, is that all you need to know? Not hardly. First of all, buying shares of these stocks isn’t possible for Americans. What we buy instead are American Depositary Receipts (ADRs), which could represent a single share of stock, a fractional share, or even multiple shares of that company, and which avoids the potential problems of exchange rate changes. This is a good thing, but it’s still not the only thing you need to know. There are other considerations such as foreign tax laws, remembering that some of the dividends you get paid will be withheld as foreign tax and which you have to claim credit for as tax paid on your US tax return.
Even more important is the possibility in some investments that the country’s laws may be such that the country takes away some important privilege that the company uses, completely changing the suitability of the investment for you. Does your investing style, or risk tolerance, allow for that possibility?
(Disclaimer: I’m not saying that any of these considerations apply to the 2 stocks mentioned above.)
If not, you might want to consider the fact that you can, despite the “obvious” idea above, invest internationally in effect by buying the stocks of companies which earn a considerable portion of their revenue each year from countries other than the United States.
Qualcomm (QCOM), for example, earns a whopping 94% of their revenue elsewhere! Coca-Cola (KO) earns 76% of their money outside the United States! McDonalds (MCD) and Hewlett-Packard (HPQ) come in at 65%, with Apple (AAPL) and 3M (MMM) both at around 63%. That’s a pretty interesting way to go about making sure that your portfolio isn’t completely dependent on the U.S. economy, and that can be a very good thing.
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September 26th, 2010 at 11:58 am
Thanks for this post. It’s very useful.