Investing abroad can be great for your portfolio. It can also be a risky proposition since unfamiliarity with foreign territory can lead to big mistakes and loss of funds. Here are seven mistakes to avoid when investing abroad.
Investing in the Wrong Country
When a few successful companies in any given country make the news, it can seem like business is booming abroad. This can signal a good investment opportunity, but it’s important not to go overboard. Educate yourself on a country’s economy, political situation, and import and export laws before jumping in headfirst. Investments in some countries may look like sure bets on the surface, but if their inflation rates are unstable or their industries depend heavily on another nation, a good situation can quickly turn bad.
Only Thinking About the Short Term
Even the savviest investors can get over-excited about making a quick buck now when they should look further into the future instead. Consider your investments to be long-term propositions, and do your homework to learn about a company’s growth potential and earning possibilities. If your potential investment relies on a get-rich-quick scheme with no long-term plan, step back and reconsider.
Investing With the Wrong Currency
You can acquire stocks through many different methods, whether you’re managing your own portfolio or working with a broker. Sometimes it’s best to purchase stocks in the appropriate foreign currency and send money abroad to benefit from a favorable exchange rate. Other times it’s best to use American Depository Receipts to acquire foreign stocks or to go through a United States broker to purchase foreign stocks in U.S. dollars. Make a point of understanding all of your options, including current rates, fees, and exchanges.
Only Investing in Major Brands
Major brands and household names can sound like a solid investment since they’re typically well-regarded and successful companies. If you have the extra cash, this can prove to be a good opportunity, especially if the company has a positive growth plan or intends to expand by purchasing other successful firms. If you’re only looking at big brands that have already achieved success, though, you might get sticker shock when you see the sky-high stock prices. If you want to spend less, diversify your portfolio, and grow alongside a smaller company, consider some lesser-known foreign firms.
Risking Too Much
Before you start investing, establish firm ground rules for your endeavors. Know what you can afford to risk and exactly how you want to play the game before you’re in too deep. When forming an investment plan, consider not only your savings and cash flow but also your age. If you’re in your 20s or 30s and have extra cash to work with, you might feel more comfortable with a bigger risk. If you’re approaching retirement age or other major life changes, play it safer and risk less. Your risk is a personal decision, and one that you and your advisor can best determine.
Failing to Follow IRS Reporting Rules
Whether you’re living in the U.S. or abroad when you invest in a foreign company, it’s important to follow the appropriate guidelines for reporting your investments to the Internal Revenue Service. These rules can be complicated, depending on where you hold the funds, where you live, and where you’ve invested your funds. Be sure to talk with a tax and investment professional to be sure that you’ve checked all of the appropriate boxes.
Not Investing at All
The rules and regulations for investing abroad can be complex. Sometimes they appear so daunting that investors who are otherwise ideal candidates simply decide not to get involved. Whatever you do, don’t let inaction get the best of you. Find a way to work with the red tape, and don’t let your extra cash sit around not working for you. Do your research, find a trusted advisor, and set yourself up for success by investing abroad.
Investing abroad can be a great business move for new and experienced investors alike. Be sure to avoid these common mistakes, and you might be on your way to a diverse investment portfolio before you know it.