Diversifying abroad is one of the best things you can do for your portfolio. People tend to live in a bubble, forgetting about the countless investment options outside their home country. Those investing offshore generally have less risk, higher returns, and greater success though.
With that said, a lack of familiarity with foreign markets can lead to uninformed decisions. Below are three common, yet rarely talked about mistakes you should avoid when investing offshore.
Making a Lifestyle Purchase, Not an Investment
If you’re like many global investors, you first started out as a tourist. Travelers sometimes visit a country, enjoy themselves, notice condo advertisements, and choose to invest in their new favorite holiday destination.
But you should fully understand what you’re buying and your own personal goals first. Do you want a second-home, or are you looking for a yield-optimized investment? Have you estimated the property’s returns, or do they not matter as much to you as having a pool?
Of course, there aren’t any wrong answers to those questions. Yet people sometimes trick themselves into thinking they’re investing when they actually just bought a second home.
I’ve had people counter with the notion that something can be both an investment and a lifestyle purchase at the same time. Separating your investments and other assets is far more practical though.
That’s mostly because a good investment doesn’t necessarily make a good lifestyle purchase and vice-versa. For example, you might prefer living in a two-bedroom condo in a place where larger units have horrible rental yields.
Quite simply, don’t buy an apartment on a Southeast Asian beach and call it an investment when you haven’t considered alternatives. Just because you’re buying an asset in an emerging market doesn’t mean it will appreciate in value either.
Investing Offshore “The Easy Way”
Mutual funds and ETFs (exchange traded funds) are the most common vehicles people buy international stocks through.
These funds let you invest in hard-to-access emerging markets with little effort, using an existing broker in your home country. Small and large investors alike pump billions into mutual funds and ETFs because of their convenience. You might even own shares of them yourself.
However, while these options are simple and user-friendly, they’re also probably the worst methods of investing offshore – especially in Asia’s emerging economies.
A large reason is because most of these funds don’t even invest in emerging markets. For example, the iShares MSCI Emerging Markets ETF is the largest in the world, but a large number of its holdings are in developed markets.
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 high commissions for international trades. In a recent article, we discovered that a trade on the Hong Kong stock exchange costs $32 with a major U.S. brokerage 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. The end result is more money in your pocket though.
Picking the Wrong Countries
We noted further above that many international investors begin as tourists, or at least lived in a country before investing there. As such, they often see things through rose-colored glasses 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 sometimes buy property or stocks in a certain country only because they personally enjoy the place. Needless to say, that doesn’t make it a good investment.
In other cases, people won’t look at different options before making an international investment. They’ll buy property in Thailand without ever comparing prices, rental yields, and appreciation potential with real estate in Malaysia or Cambodia.
They usually don’t even care because they simply want property in a specific place for their own personal reasons. But that’s not investing. It’s buying a second home… or perhaps just a trophy asset.
Either way, target an optimized mix of risk and return if your goal is making money.
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