Foreign portfolio investments are those that are based outside your domestic marketplace. For American readers, that most often means investing in stocks, bonds, or currency outside the United States.
5 Benefits of Foreign Portfolio Investment
- Portfolio Diversification
- Exchange Rate Benefits
- Access to Credit
- Less Competition
Foreign portfolio investment may sound like it belongs only in the conversations of yacht owners with properties around the world. But actually, it’s far more accessible than you think.
If you invest a portion of your weekly or biweekly paycheck into something like a 401(k), there’s a decent chance you’re already participating in foreign portfolio investment. That’s because many brand name companies in America are actually foreign entities. Nestle, Toyota, and Royal Dutch Shell are just a few of the largest and most recognizable companies in their respective spaces – one based in Switzerland, the other in Japan, and the other in the United Kingdom.
What Is a Foreign Portfolio Investment?
A foreign portfolio investment is when an investor spends domestic cash to purchase stocks, foreign bonds, or foreign currencies, to name a few options.
What is the difference between portfolio investment and foreign direct investment?
Foreign portfolio investment should not be confused with actual ownership in a foreign business, which is called Foreign Direct Investment. Nor should it be confused with investment in real property outside your own country.
Rather, foreign portfolio investment involves purchasing shares of securities and other types of financial assets like stocks, bonds (corporate and government), and foreign currency like Euro, Pounds Sterling, or Yuan, etc.
5 Benefits of Foreign Portfolio Investments
What are the benefits of foreign portfolio investing? Done correctly, these investments can be an important part of your personal finance strategy.
Foreign investments allow you to diversify your portfolio. You’ve probably heard the phrase that you shouldn’t put all your eggs into one basket. When it comes to investments like stocks, that usually means purchasing shares of different companies in different industries. When one industry is doing poorly, the others in your portfolio can compensate and balance out the overall performance of your portfolio.
But what if an entire marketplace is down? That’s where global investments can come in handy. The London stock exchange can be down, but if the NASDAQ is up and you own securities in both exchanges, your portfolio will balance out. The same is true for bonds and even currency. If the value of the US dollar is down but the Yuan is up and you own both, then your overall net worth will be okay. Compare these types of situations to one in which you only own domestic stocks, bonds, and currency. A dip in the marketplace can negatively impact your net worth for as long as the downturn occurs.
Exchange Rate Benefits
As you may know from traveling abroad, exchanging one currency for another is never a one-for-one process. Currency exchange rates compare any given currency to another, and the stronger currency is worth more of the lesser.
Currency values fluctuate, just like stocks. This fluctuation, however, is not a cause for concern if you own multiple types of currencies. Moreover, you can occasionally leverage the fluctuations in currency price towards your advantage, such as liquidating valuable currency for a significant sum toward your next investment, or allowing it to swell your net worth so you have a more attractive portfolio for approaching a lender.
Diversifying your portfolio with different types of cash around the world can be a great way to benefit from exchange rates. For retail investors who are not experienced with playing the field of the real exchange rate, this type of activity can be quite risky and might be one to avoid, at least in terms of capitalizing on short term swings.
Liquidity is another benefit of investing in financial assets around the world. Assets like stocks, bonds, mutual funds, and cash are actually financially liquid…and of course, there is nothing more liquid than cash. In case you’re wondering what exactly liquidity means, it refers to how easily you can liquidate an asset for the cash value of its current market price. By contrast, assets like business ownership and real estate are not liquid assets, because there is often a complex and lengthy (in terms of time) legal process behind transferring ownership of these assets, even in different countries.
Stocks, mutual fund shares, and ETFs are just a few examples of tradable assets that can be bought and sold with the push of a button right from your computer or phone. While liquidity is a trait inherent to these types of publicly traded assets in general, diversifying your portfolio across international lines can lead to an even greater amount of liquidity, especially in foreign currencies.
Access to Credit
Foreign portfolio investments can often open additional lines of credit. Typically, a lender in the United Kingdom may not be interested in extending credit to an American investor, even if they have a significant portfolio. Likewise, a lender in Africa may not be interested in extending credit to a British investor, even if their portfolio is strong on paper. This is because the liquidatable assets owned by said potential borrowers may not be so easy for the creditor to take as collateral. But investors with assets in different countries may find it much easier to strike up a conversation with a potential lender in a foreign marketplace.
If you’re wondering why this is important, it could be the gateway to diversifying one’s business by entering a new market. A growing investor who has built up cash flow in other areas like real estate may need cash in specific locations. Portfolios with assets that can be offered as collateral may make all the difference when securing a loan in these marketplaces.
As it relates to the average retail consumer, however, international investments will not be a good source of credit. If you are in need of credit or reestablishing credit for necessary purchases like an auto loan or mortgage, your best bet is to discuss it with someone who offers credit counseling or lending officer.
Another benefit to diversifying your portfolio with foreign investments is that often the individual investments themselves can do very well. This is because domestic investments are often facing an uphill battle in terms of competition. By contrast, foreign companies may have significant monopolies in their respective industries and marketplaces.
For example, while the United States has around 10 significantly large telecom companies, there are only four in France. One of them, Orange, has made significant inroads in its foreign marketplaces such as Sub-Saharan Africa and the Middle East. In the same way that diversifying your portfolio can balance out its performance, some of your ownership in foreign company stocks can yield incredible outliers that outperform the rest of your portfolio…all because they have less competition in their own marketplaces.
What Are the Best Foreign Portfolio Investments?
Foreign financial assets can be difficult for retail investors to navigate without a nuanced understanding of international economics. Institutional investors like large banks or investment firms are better equipped to add a foreign investment to their portfolio, such as debt securities, a corporate bond issued by a company that operates in emerging markets, or even just cash. It can be tempting to look at developing countries as an exciting venue for economic growth and therefore a great opportunity for foreign investors. Indeed they are – if you are an overseas investor experienced in spotting opportunities.
But foreign portfolio investors who cannot perform fundamental analysis of a company – or of any potential financial asset in a foreign country – are better off looking at tapping into foreign markets through the self-managed brokerage that they use. For instance, you can easily buy shares of NXP Semiconductors (based in the Netherlands), Dole (based in Ireland), and Unilever (based in the United Kingdom).
If a lesser known company has attracted the attention of a foreign portfolio investor, and it is not supported by a typical trading platform, the investor can contact a stock broker to obtain shares. However, the same rules apply to foreign investments as they do to domestic investments: bigger established companies are safer bets, with less competition, low debt, and a typically wide moat around their product. In other words, the best foreign investments are probably companies that you already recognize from your own life as an American consumer.
Is Gold a Foreign Portfolio Investment?
Purchasing gold is not typically mentioned in personal finance strategies. Gold is no longer used as a medium of exchange in everyday interactions, so it is off the radar of most retail investors. But gold is a highly liquid asset that carries no credit risk and is internationally recognized – and it has been for thousands of years.
That said, gold is not a foreign investment because it’s something you can also invest in right here in the United States. In some cases, an investor might have gold stored in an overseas location. For example, many private investors store gold in Switzerland, and there are large institutional investors and even entire country governments that store their gold in the vaults of the Bank of England.
For the average American retail investor, gold can be stored right at home in a safe, a bank deposit box, or with a company that will take a portion of your paycheck or a periodic credit card payment and put it toward a precious metal of your choice – like gold or silver – and store it in vaults in the United States. Although gold is international, it is not really a foreign investment. Remember that foreign investments are more about financial assets like stocks, bonds (government and corporate), and cash.
Foreign Portfolio Investments
Adding foreign investments to your portfolio may seem like a lot to juggle. But as mentioned, many of the largest foreign companies in established markets and developed countries are already household names in America. They are publicly traded on stock exchanges like the NYSE and NASDAQ. All it takes is some quick research to see which ones have the highest dividend yield or have grown the most in the past few years, and then with a few clicks or swipes on your computer or phone, you can add them to your portfolio.
For those investors with a little more trading knowledge, bonds and cash can also be good investments. But again, you don’t need to be an international investor who is fully dedicated to trading to profit from foreign investments. Like many things in the realm of personal finance and investments, stock trading has become quite accessible to the average consumer, thanks to modern technology and personal finance software. By taking advantage of tools like a brokerage platform, YouTube, and internet articles, you can learn how to get started in the world of overseas investments.