Last updated November 3rd, 2019.
Arguably, investing offshore is the best thing you could ever do for your portfolio. People often live inside a bubble, forgetting about the numerous investment options outside of their home country’s borders.
The fact is: investors who diversify abroad generally enjoy less risk, higher returns, and greater success.
With that said, lack of familiarity with foreign markets can lead to uninformed decisions. Below are three common, yet rarely-mentioned mistakes you should avoid when investing offshore.
1. Making a Lifestyle Purchase, Not an Investment
If you’re like many global investors, you probably first started out as a tourist.
Travelers sometimes visit a country, enjoy themselves, notice condominium ads, and choose to invest in their new favorite holiday destination.
First though, you should understand exactly what you’re buying along with your own personal investment goals.
Do you want a second home, or are you looking for a yield-optimized investment? Did you ever estimate the property’s returns, or do they not matter as much as having a pool?
Granted, there aren’t any incorrect answers to those questions. Yet people will sometimes trick themselves into thinking they’re investing… when they actually bought a second home.
I’ve had people counter with the notion that property can be “both an investment and lifestyle purchase at the same time”. But separating an investment from your other assets is far more practical.
That’s because a good investment doesn’t necessarily make a good lifestyle purchase and vice-versa. For example, you may prefer living in a four-bedroom condo in a city where larger units have horrible rental yields.
Quite frankly, never buy an apartment on a Southeast Asian beach and call it an “investment” when you haven’t considered any alternatives.
Just because you are buying a real estate in a so-called emerging market does not necessarily mean it’ll quickly appreciate in value either.
This villa seems like a great place to spend time. Regardless, it isn’t really an investment with Phuket’s staggeringly high vacancy rates and rental yields on large villas hovering around 3%.
2. Investing Offshore “The Easy Way”
Mutual funds and ETFs (exchange traded funds) are definitely the most common vehicles that people trade international stocks through.
Funds and ETFs let you passively invest in emerging markets with less effort, using an existing stock broker in your home country.
Large and smaller investors alike pump billions into mutual funds and ETFs each year because of their convenience. You might already own shares in such a fund.
However, while those options are simple and user-friendly, they’re perhaps the worst methods of investing offshore – especially in Asia’s emerging and frontier markets.
Why are funds and ETFs a poor choice? One important reason is that most of these funds don’t even invest in their namesake and are falsely advertised.
For example, the iShares MSCI Emerging Markets ETF is the biggest fund of its type. Significant amounts of its holdings (about 40%) are in developed markets including South Korea, Taiwan, and Qatar though.
Similarly, investors will often buy stocks in Asia using a brokerage based in their home country. It might be convenient, yet also subjects you to massive fees.
Brokers charge extremely high commission rates on international trades. In a recent article, we discovered that one single trade on the Hong Kong Stock Exchange costs $32 through a major online brokerage in the United States, but under $1 through a local account.
The best offshore investments require some amount of effort. You’ll probably spend time and setup costs using local, on-the-ground options. Thankfully, the end result equals more cash in your pocket.
3. Picking the Wrong Countries
We noted further above that many international investors begin as tourists. Or at least lived in a foreign country before investing there.
As such, they tend to see through rose-tinted along with an unhealthy dose of bias. Their lack of objectivity leads to rash, ill-informed choices.
This problem can manifest itself in several ways. Investors frequently buy property or stocks in a certain country only because they personally enjoy the place.
Needless to say, your good experiences in a tourist destination doesn’t necessarily mean that owning real estate nearby is a solid investment.
In similar cases, people won’t ever consider different options before making an international investment. They’ll buy a condo in Thailand without ever comparing prices, rental yields, and appreciation potential with property in Malaysia or Cambodia.
They usually don’t even care because they merely want real estate in a specific place for their own personal reasons. But that isn’t investing: it’s buying a second home. Or maybe a trophy asset.
Either way, consider an optimized mix of risk and return if your goal is purely making money with your investment. Don’t get trapped in the alure of “offshore”.
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