Oran Hall | Investing in securities on the international market

The securities markets of the world, their varying stages of development notwithstanding, aided by technology and fast round-the-clock communication, offer significant scope for investors to diversify their investments and increase their total returns.

The desired outcome is not guaranteed as even the best risk management strategies do not totally eliminate risk.

Before you invest in markets outside of your own country, you should decide if international investing aligns with your investment strategy. To make that determination, consider the following: your financial goals and investment objectives, the cost of buying and selling the securities, prospective returns, your risk tolerance, and the market in which you propose to invest.

Sustainable returns

To determine whether the market is to your liking, you should look at the economic stability of the country, its political climate, and regulatory framework to get an idea of the likelihood of your getting reliable, sustainable returns in an environment that is orderly and gives adequate protection to investors.

To enhance your ability to get favourable results, consider the following: do serious research of the markets, diversify across markets, become aware of the types of instruments and industries, work with a seasoned and reputable investment advisor in your market, avoid concentrating your funds in a single security or fund, stay informed, and resist the temptation to be greedy.

There are good reasons for investing in the markets other than your own. Portfolio diversification is a big one. It gives exposure to several economies, sectors, currencies, types of securities like stocks, bonds, mutual funds, exchange-traded funds, real estate investment trusts, and depository receipts, for example, potentially adding new sources of income; it increases your options. It mitigates the systematic risk associated with your country’s economy through political events, policy change, recession and natural disasters.

It also levels out some of the volatility of your portfolio because all markets do not rise and fall at the same time. Volatility is likely to be more in emerging markets – countries that have developing capital markets and less stable economies. Emerging markets do not have the stability of developed markets which are mature and have established industries, widespread infrastructure, secure economies and a relatively high standard of living.

If the value of your currency is weak – having a low or decreasing value against other currencies – an international portfolio can be beneficial. When your currency loses value, you get more local currency when you convert from a foreign currency. Therefore, if the exchange rate of the Jamaican dollar to the US dollar moves from 155:1 to 157:1, every US dollar you hold is worth 157 Jamaican dollars instead of 155 JMD. Such gains can potentially offset or reduce losses in the local portion of your portfolio. On the other hand, when your local currency gains against foreign currencies, converting foreign currency to local currency causes you to get less local currency, thereby reducing your portfolio return.

Unfavourable conditions

Some unfavourable conditions in the local economy and market can also develop in other economies and markets, for example, high inflation, low growth rate of the economy, high interest rates, natural disasters, policy changes. Some economies and markets are stronger and more resilient than others. Thus, it is important to exercise care in selecting the markets in which you participate. Choice of product is also important.

Although information is generally readily available, being at a distance from a market can be a big disadvantage. For example, direct access to analysts can be limited. Additionally, it can be difficult to understand the workings of a market you are not familiar with. Not being close to developments in a market can put you at a disadvantage in cases such as a bond issuer experiencing difficulty – a situation you as a foreign investor could be unaware of.

One area that can be challenging to you as an investor involved in a market other than your own is access to legal remedies when you experience unfair losses or are the victims of unethical conduct, not to mention not knowing the regulations and practices of the foreign market. Generally, the help you need will not come in your own country, not even from the financial advisers who made the recommendations and facilitated the transactions in the first place. This is an area of great risk.

Investing in markets in other countries can potentially yield higher total returns than just investing in your home market. Avoiding total dependence on an investment advisor, keeping informed before and after making your investment decision and ensuring that each decision is consistent with your investment goals and objectives, and risk tolerance are key to your success.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel. finviser.jm@gmail.com