Four Things to Consider When Investing Overseas
By Dale Gillham |
I’ve found there is a common theme when speaking to young aspiring traders and investors, which is quite concerning. They have the belief that investing overseas is more profitable but this couldn’t be further from the truth. But just because an overseas market is bigger or performing better, doesn’t guarantee that you will make more money.
There are a number of factors that affect your returns when investing overseas which are commonly overlooked. Outlined below is what you need to consider when investing overseas.
Exchange rates and currency risk
One of the biggest factors that is commonly forgotten when investing overseas is the exchange rate. When Investing overseas the price of the dollar will impact your returns because foreign investments are exposed to the risk of movements in exchange rates.
If the value rises against a particular currency, the value of investments held in that currency will fall. Inversely, a fall in the currency will increase the value of your investments.
If the Australian dollar is trading lower, you have lower purchasing power and US shares become more expensive. Where as when the AUD is higher, it has stronger buying power, which means the price for American shares may become more attractive. But if you sell shares and the dollar is higher, you will get significantly less returns as the dollar is more expensive to buy back.
So, ultimately you are losing out on profits due to exchange rates.
Additional costs and fees
Investing internationally can also be more expensive than investing domestically. In some countries there may be unexpected taxes, such as withholding taxes on dividends or rental income and transaction costs such as broker's commissions, which all need to be accounted for when calculating profits.
If you aren’t careful the additional costs and fees of investing overseas can have a significant impact on your profits.
Tax on foreign income
If you are considering international investments, it's important to know how foreign income is taxed and how this will impact your investment returns. Income from international shares, may be subject to double taxation, which means you could pay double the amount of tax on your investments.
It can be difficult to find up-to-date information on foreign companies and assets. Some foreign companies may not provide investors with the same type of information.
Finding quality and accurate information from overseas is incredibly difficult. Even if you do find information, how it will affect you as an international investor is often not taken into account.
Investing overseas isn’t what it seems, so don’t be led down the path to mediocre returns. When something sounds too good to be true, in most cases it is. And in this instance that is the case.
In my latest book, Accelerate your Wealth, I show investors how they can achieve better returns just by trading the top 20 stocks by market capitalisation.