For those individuals who wish to expand the range of investment opportunities they have available, a common approach is to invest outside of the United States. While it’s possible to gain international exposure through domestic markets (such as by buying stock in U.S. companies that have a large multinational presence, or buying shares of foreign companies that are traded on U.S. stock exchanges), some investors are looking to commit more directly to investment opportunities outside the United States.
Before you devote a portion of your investment portfolio or self-directed IRA to investments abroad, here are some things to consider.
Publicly Available Information. Many of the regulations that govern the U.S. stock market have one thing as their goal – the protection of investors by making sure they have as much information as possible about potential investments. These public company disclosures are a necessary part of being able to offer securities on U.S.-based exchanges.
In large part, these types of investor protections don’t exist in most other countries around the globe. So before making any investments abroad, be sure you have all the information you need to make an intelligent and well-informed decision.
Taxes. Making investments outside of the United States can trigger tax liabilities in those countries. While tax treaties between the U.S. and certain other countries can reduce that liability, that’s not always the case. It’s therefore essential to consult a tax expert so that you know exactly what to expect in tax liabilities. It’s also important to note that the tax landscape abroad can change over time, potentially to the detriment of your investments.
Currency Exchange Risk. Similarly, currency exchange rates fluctuate over time, and sometimes these fluctuations can be significant. And even if you have any long-term horizon for your foreign investment, at some point you’re going to need to bring the money back into the United States. If the dollar has strengthened in relation to the currency of the country you are investing in, then you’ll be losing a portion of your investment gains simply because of the currency exchange. There are ways to hedge against this risk, but doing so can greatly increase the complexity and costs of investing abroad.
Ownership and Currency Transfer Restrictions. Some countries have laws that restrict the types and amounts of assets that non-citizens can own. For example, numerous areas throughout Europe and Central America restricting the ability of foreigners to own real estate outright. or to own more than a minority interest in certain local industries. Some countries also limit how much money can be transferred outside of their borders, although this type of restriction is less common than the real estate ownership limitations. Before you go too far in planning an investment in a particular foreign country, be sure there are no legal limitations to you reaching your goals.
Investing abroad can be highly rewarding, but only if you understand all of the potential obstacles and challenges you may face.