Investing in foreign markets, a good/bad idea?
May 25, 2011 7:16 PM Subscribe
What should I know about investing in foreign markets, especially with regard to risk?
My husband and I are newlyweds in our late 20's. We received some cash gifts for our wedding. It's not a huge amount of money, but it's enough that we are considering investing it. It's also enough that we can't afford to have it all go up in smoke if the investment goes awry.
My husband thinks we should invest the money in foreign markets, such as China or India. He told me he has invested this way in the past with a smaller amount and received really great returns. Maybe I'm just a n00b, but that set off alarm bells in my head. "No risk, no reward," sure... but the tradeoff for more rewards is always more risk, right? He assured me that though there is always some degree of risk in investing, the risk here would be sufficiently low. I'm rather skeptical, as he was talking in terms of doubling our investment within a year or two. I just don't understand how an investment with returns like that could be considered low risk... it sounds too good to be true.
So basically my problem is that I know nothing about the stock market, or investing in the stock market, let alone investing in foreign stock markets. I'd be perfectly happy to stick the money in a high-yield savings account and call it a day, or use it to purchase mutual funds or some other safe, long-term investment. So what are the pros and cons of investing in a foreign market? What's the best way to do it? What level of risk would we be dealing with, and am I being too risk-averse at our young ages? If not foreign stocks, what other types of investments should we look into?
I apologize if this question is poorly phrased. I know so little about the realm of money and investments that I barely know which questions to ask or how to ask them.
My husband and I are newlyweds in our late 20's. We received some cash gifts for our wedding. It's not a huge amount of money, but it's enough that we are considering investing it. It's also enough that we can't afford to have it all go up in smoke if the investment goes awry.
My husband thinks we should invest the money in foreign markets, such as China or India. He told me he has invested this way in the past with a smaller amount and received really great returns. Maybe I'm just a n00b, but that set off alarm bells in my head. "No risk, no reward," sure... but the tradeoff for more rewards is always more risk, right? He assured me that though there is always some degree of risk in investing, the risk here would be sufficiently low. I'm rather skeptical, as he was talking in terms of doubling our investment within a year or two. I just don't understand how an investment with returns like that could be considered low risk... it sounds too good to be true.
So basically my problem is that I know nothing about the stock market, or investing in the stock market, let alone investing in foreign stock markets. I'd be perfectly happy to stick the money in a high-yield savings account and call it a day, or use it to purchase mutual funds or some other safe, long-term investment. So what are the pros and cons of investing in a foreign market? What's the best way to do it? What level of risk would we be dealing with, and am I being too risk-averse at our young ages? If not foreign stocks, what other types of investments should we look into?
I apologize if this question is poorly phrased. I know so little about the realm of money and investments that I barely know which questions to ask or how to ask them.
Oh, and I am not a financial advisor and the above should not be construed as personalized financial advice. Seeing a financial advisor may be a good idea for you, but I also think it's possible to do it on your own with a bit of research, especially when you're young and don't have complex estate issues yet.
posted by mullacc at 7:57 PM on May 25, 2011
posted by mullacc at 7:57 PM on May 25, 2011
Money is one of the biggest areas of stress in relationships. You have a wonderful opportunity in front of you, as newlyweds, to use this as a case study for how you want to handle financial issues in your marriage - is it all "our" money, or is some "mine", "yours" and "ours"? If it's separate, can he invest "his" share without consulting you? If investment decisions are to be made jointly, will they require the consultation of a neutral third party like a financial advisor? What is each party's risk tolerance in dollars? As a percentage of your assets? How do you learn more about things you don't know about (like foreign markets) from a trusted sources so you can make informed decisions? These are great questions to discuss in the abstract - while the money is safely in a savings account - and then proceed from a position of confidence when, and only when, you're really ready.
posted by judith at 8:55 PM on May 25, 2011 [2 favorites]
posted by judith at 8:55 PM on May 25, 2011 [2 favorites]
Treat it like a game. Split the amount in half, let him do what he likes with his (foreign stocks), and put yours in a high yield savings account or something else you feel comfortable with. See who does better.
At least if (when) he loses all his half, you'll still have a cushion.
This will presumably also teach him something valuable about investing, and about trusting your judgement.
posted by lollusc at 8:59 PM on May 25, 2011 [1 favorite]
At least if (when) he loses all his half, you'll still have a cushion.
This will presumably also teach him something valuable about investing, and about trusting your judgement.
posted by lollusc at 8:59 PM on May 25, 2011 [1 favorite]
he was talking in terms of doubling our investment within a year or twoAnyone who tells you about how you're going to double your investment in a year or two is either ignorant or else lying, full stop. Especially when:
He assured me that though there is always some degree of risk in investing, the risk here would be sufficiently lowNote that this is not to say that investing in foreign markets is necessarily bad. But your husband is either ignorant or lying.
posted by Flunkie at 10:28 PM on May 25, 2011 [1 favorite]
If your husband's goal is to double your money in a year, he's not investing, he's gambling. There's nothing wrong with gambling, just so long as you know that's exactly what you're doing with your money.
Your husband should also be aware that a large number of Chinese companies listed on U.S. stock exchanges are under investigation for fraud. In the most recent incident, Deloitte, the outside auditor for Laptop Financial Technologies, resigned after discovering massive fraud in the company's financial statements. After investigations are announced, trading in these securities is suspended; when it resumes, the value of the the stock typically plummets. A simple Google search will turn up about a dozen cases this year alone.
If you'd like to learn more about investing, Berkshire Hathaway's annual shareholder letters are a good place to start. They're written in plain English, and they give you an insight into the investment strategy of one of the United States' most successful investors. That's not to say that your strategy and tolerance for risk should be the same as Warren Buffet's, but his views are definitely worth considering.
posted by hawkeye at 10:51 PM on May 25, 2011
Your husband should also be aware that a large number of Chinese companies listed on U.S. stock exchanges are under investigation for fraud. In the most recent incident, Deloitte, the outside auditor for Laptop Financial Technologies, resigned after discovering massive fraud in the company's financial statements. After investigations are announced, trading in these securities is suspended; when it resumes, the value of the the stock typically plummets. A simple Google search will turn up about a dozen cases this year alone.
If you'd like to learn more about investing, Berkshire Hathaway's annual shareholder letters are a good place to start. They're written in plain English, and they give you an insight into the investment strategy of one of the United States' most successful investors. That's not to say that your strategy and tolerance for risk should be the same as Warren Buffet's, but his views are definitely worth considering.
posted by hawkeye at 10:51 PM on May 25, 2011
Response by poster: Thanks everyone for your answers... I need to clear something up. I must have misunderstood what he said about the rate of return. I asked him about it again and he said in the past few years it's been around 10% per year. I was way off, sorry about that.
mullacc, thanks for the advice and the reading recommendation. hawkeye, that's really good to know, and thank you for the link! judith, it's definitely "our" money, it's not going anywhere until we are both comfortable with the decision.
posted by keep it under cover at 11:01 PM on May 25, 2011
mullacc, thanks for the advice and the reading recommendation. hawkeye, that's really good to know, and thank you for the link! judith, it's definitely "our" money, it's not going anywhere until we are both comfortable with the decision.
posted by keep it under cover at 11:01 PM on May 25, 2011
Big question: what are you saving for? Retirement? (You should be, though not necessarily with this money. Up to you.) International stocks are an almost-required part of a long-term portfolio. Yes, they can be volatile-- you're not wrong about the risk-- but you can afford that over 30-40 years in exchange for higher returns.
I have two major issues with your husband's position, though. First, doubling your money in two years? MADNESS. Run away! He can't guarantee that. No one can. Second, you don't say if the two of you'd be picking individual stocks, but I suspect that's also part of the plan. Bad idea. Index investing (that is, investing in a fund that owns bits of everything and strives to be exactly average) is likely to make you more in the long run. It avoids putting all your eggs in one basket or faith in one investor (Husband), and you'll save serious $ in fees. Betting on *just* China or India is similarly silly. If you go international, go broad.
I'm sure others can recommend primers on investing, but I'll just say for now that any get-rich-quick scheme is likely a loser, and any investment plan that relies on one thing (international, real estate, gold, etc.) is too risky. Look for low-cost ways to invest in a broad range of stuff, and if you can, take advantage of retirement vehicles like a Roth IRA or 401k. If you don't know what those things are, Google them before you do anything else.
posted by Agamede at 11:07 PM on May 25, 2011
I have two major issues with your husband's position, though. First, doubling your money in two years? MADNESS. Run away! He can't guarantee that. No one can. Second, you don't say if the two of you'd be picking individual stocks, but I suspect that's also part of the plan. Bad idea. Index investing (that is, investing in a fund that owns bits of everything and strives to be exactly average) is likely to make you more in the long run. It avoids putting all your eggs in one basket or faith in one investor (Husband), and you'll save serious $ in fees. Betting on *just* China or India is similarly silly. If you go international, go broad.
I'm sure others can recommend primers on investing, but I'll just say for now that any get-rich-quick scheme is likely a loser, and any investment plan that relies on one thing (international, real estate, gold, etc.) is too risky. Look for low-cost ways to invest in a broad range of stuff, and if you can, take advantage of retirement vehicles like a Roth IRA or 401k. If you don't know what those things are, Google them before you do anything else.
posted by Agamede at 11:07 PM on May 25, 2011
Response by poster: Also, no we wouldn't be picking individual stocks, but choosing a fund.
Though from what I'm seeing here, I'm thinking it's a better idea to back away from foreign stocks entirely. We obviously both have a lot to learn about investing and putting all our eggs in the foreign market basket is not the way I want to learn my lessons.
posted by keep it under cover at 11:24 PM on May 25, 2011
Though from what I'm seeing here, I'm thinking it's a better idea to back away from foreign stocks entirely. We obviously both have a lot to learn about investing and putting all our eggs in the foreign market basket is not the way I want to learn my lessons.
posted by keep it under cover at 11:24 PM on May 25, 2011
Ah, I'm much reassured by your responses. You both sound quite sensible. I wouldn't run away from foreign stocks forever, but there's also no rush. Take your time and study up before plunging in. You'll do swell.
posted by Agamede at 11:54 PM on May 25, 2011
posted by Agamede at 11:54 PM on May 25, 2011
Investors often think that foreign markets has better yield because they have higher GDP growth. A recent Economist article refute this notion:
http://www.economist.com/research/articlesBySubject/PrinterFriendly.cfm?story_id=18713528
Risks in foreign market are many: currency exchange risk, liquidity risk, political risk and simple lack of knowledge. Adding to the usual fraud and economic risks and you have a potpourri of unknowable risks. Frankly, I don't even trust the US stock market right now, let alone some third-world market. The only reliable source seem to be index fund, then Warren Buffett. Mark me paranoid, but the shell game on Wall St has done nothing but reducing my net worth in the past decade or so.
posted by curiousZ at 12:58 AM on May 26, 2011
http://www.economist.com/research/articlesBySubject/PrinterFriendly.cfm?story_id=18713528
Risks in foreign market are many: currency exchange risk, liquidity risk, political risk and simple lack of knowledge. Adding to the usual fraud and economic risks and you have a potpourri of unknowable risks. Frankly, I don't even trust the US stock market right now, let alone some third-world market. The only reliable source seem to be index fund, then Warren Buffett. Mark me paranoid, but the shell game on Wall St has done nothing but reducing my net worth in the past decade or so.
posted by curiousZ at 12:58 AM on May 26, 2011
One last comment: I've found Morningstar to be a great reference for DIY investing. A full membership is $20/month, $180/year. It has a wealth of information, thoughtful reviews of individual stocks and mutual funds, and a number of tools that allow you to search through investment options by various criteria (e.g., stocks/mutual funds, large cap/small cap, international/domestic, historical performance, etc.).
posted by hawkeye at 1:40 AM on May 26, 2011
posted by hawkeye at 1:40 AM on May 26, 2011
How I would invest this money would depend on how much of a financial cushion you already have. It's commonly recommended that you keep enough money to pay basic expenses for 3 months (or longer) in a non-volatile account. Similarly, if you have some high-interest debts (like credit card balances), you may be best off paying those off first.
There are many books out there about personal finances and investing; I bet there are MeFi threads with recommendations. It's a good idea to read 2 or 3.
posted by mvd at 3:25 AM on May 26, 2011
There are many books out there about personal finances and investing; I bet there are MeFi threads with recommendations. It's a good idea to read 2 or 3.
posted by mvd at 3:25 AM on May 26, 2011
The trouble is the big markets that are 'growing' aren't mature enough to really bring high consitant returns. China still has a ways to go in sophistication, and India's gap between wealthy, poor and poorer holds them back from getting on par with European countries and getting investment/exchange listings outside of India. Singapore is a probably the best marketplace, but it's a small city-state and just can't drive an economy the size needed to look like the US market.
That being said, foriegn stocks/funds as a component of your portfolio would be a good idea. Though you want to be sure to research good funds. Any market investment carries risk, as we all have seen recently, and basically every 10-11 years in varying degrees.
The thing is, do you go for a country specific mix, which also has you betting on the exchange rate in essence, or a more global mix, where you're hoping that the exchange risk will level itself out cross-currency.
posted by rich at 6:18 AM on May 26, 2011
That being said, foriegn stocks/funds as a component of your portfolio would be a good idea. Though you want to be sure to research good funds. Any market investment carries risk, as we all have seen recently, and basically every 10-11 years in varying degrees.
The thing is, do you go for a country specific mix, which also has you betting on the exchange rate in essence, or a more global mix, where you're hoping that the exchange risk will level itself out cross-currency.
posted by rich at 6:18 AM on May 26, 2011
At your age and with your risk characteristics I would invest in equity index funds.
Assuming that you have funds you are willing to invest and hold for a fairly long term, there is no reason not to invest in foreign index funds with sufficiently low expense ratios (the cost per year to you). The primary additional risk associated with foreign stocks is the exchange rate risk, and it tends to dominate the risk of stock return. For example, here's a Graph of the dollar-euro rate (red) compared to the S&P 500 (US Equity Market Index in blue) for the last 8 years or so. You can see that the movements are roughly the same magnitude, meaning that for a Euro area investor investing in the US Stock market as a "foreign index fund", the return at any point had as much to do with the exchange rate as it did with the actual movement of the US Stock market (setting aside for the moment the correlation between the two).
This isn't necessarily a bad thing - you're exposed to exchange rate risk every day as you purchase products made overseas, plan vacations, work for a company with suppliers or customers in other countries, etc. It's just something to be aware of; a foreign index fund is primarily an exchange rate investment and secondarily a stock investment.
Long story short: If I were you I'd invest in equities. Biggest chunk in domestic funds, next biggest in developed market funds (Euro area, Asia), next biggest in emerging market funds (which have added fundamental risk due to the countries themselves). I wouldn't try to pick and choose individual countries.
posted by true at 7:15 AM on May 26, 2011 [1 favorite]
Assuming that you have funds you are willing to invest and hold for a fairly long term, there is no reason not to invest in foreign index funds with sufficiently low expense ratios (the cost per year to you). The primary additional risk associated with foreign stocks is the exchange rate risk, and it tends to dominate the risk of stock return. For example, here's a Graph of the dollar-euro rate (red) compared to the S&P 500 (US Equity Market Index in blue) for the last 8 years or so. You can see that the movements are roughly the same magnitude, meaning that for a Euro area investor investing in the US Stock market as a "foreign index fund", the return at any point had as much to do with the exchange rate as it did with the actual movement of the US Stock market (setting aside for the moment the correlation between the two).
This isn't necessarily a bad thing - you're exposed to exchange rate risk every day as you purchase products made overseas, plan vacations, work for a company with suppliers or customers in other countries, etc. It's just something to be aware of; a foreign index fund is primarily an exchange rate investment and secondarily a stock investment.
Long story short: If I were you I'd invest in equities. Biggest chunk in domestic funds, next biggest in developed market funds (Euro area, Asia), next biggest in emerging market funds (which have added fundamental risk due to the countries themselves). I wouldn't try to pick and choose individual countries.
posted by true at 7:15 AM on May 26, 2011 [1 favorite]
The simplest thing, especially if you don't have a huge amount of money - say, less than $20,000 - would be to just put whatever you want to invest in a single global index fund. Your husband gets his international exposure and you get your broad diversification (including plenty of domestic investments). For example, there's the Vanguard Global Equity Fund. Or you could do half (or two-thirds, or whatever you feel comfortable with) in that fund and the rest in a broad US market fund.
Whatever you do, make sure you use a low-fee fund company; Vanguard is the biggie, but there are others. Average mutual fund fees are often 2-3 times as high as the low-cost companies. (And definitely use an index fund, rather than a managed fund. If you don't know what that means, take a few hours with a basic investment book before getting started.)
Have fun!
posted by Mr.Know-it-some at 7:40 AM on May 26, 2011 [1 favorite]
Whatever you do, make sure you use a low-fee fund company; Vanguard is the biggie, but there are others. Average mutual fund fees are often 2-3 times as high as the low-cost companies. (And definitely use an index fund, rather than a managed fund. If you don't know what that means, take a few hours with a basic investment book before getting started.)
Have fun!
posted by Mr.Know-it-some at 7:40 AM on May 26, 2011 [1 favorite]
This thread is closed to new comments.
The typical advice for young adults (which I agree with) is to weight your investment portfolio heavily toward stocks relative to bonds. From there it makes sense to invest 50% or more in stocks outside the US--but a large portion of that should be in foreign developed markets (Western Europe, Japan, etc). So a reasonable range of emerging market stocks is probably somewhere in the range of 10 - 30%, depending on your tolerance for risk.
You should use index or mutual funds to achieve your target allocations and re-balance regularly. For an amateur investor with limited time and expertise, picking individual stocks is a hobby. That's fine, but limit the hobbyist activity to some small portion of the portfolio--say, maybe 10% at most.
If you or your husband want to read about prudent personal investing, I recommend Dave Swenson's Unconventional Success.
posted by mullacc at 7:55 PM on May 25, 2011 [1 favorite]