An Important Myth to Dispel About Foreign Stock Investing

There is a common investing behavior known as home country bias. Those who save and invest their money often have the majority of it in their home country. The reason is because this is what they are comfortable with.

Home country bias can hurt your saving plan. Most U.S. citizens have most of their investments in the U.S. It’s perceived to be the safest place with the greatest return. These last 10 years have not disappointed U.S. investors, as domestic markets have outperformed foreign markets by a large margin.

However, if you’d had all your money in the S&P 500 from 2000 through 2009, you would’ve had a negative return over those ten years. If instead you’d put just 10% of your savings in emerging market stocks, your overall portfolio would’ve returned 7% annually during those same 10 years.

That’s a big difference.

There is a faulty perception among many Americans that the U.S. is both the safest and most lucrative place to invest their money. It provides higher returns and lower risk because of the full faith and credit of the U.S. government.

This is not true. Perception does not equal reality.

When you invest in foreign stocks, you pick up additional risks, but you also diversify your geographic risk. Here are a few examples of the new risks you assume.

1. Currency Risk. This is the potential for a foreign country’s currency to depreciate faster than the U.S. dollar. For example, if you have money in the stock of a foreign country, and the value of that country’s currency falls, your investment could lose value.

2. Market Risk. This addresses market forces unique to a foreign country. Maybe in a foreign country it undergoes a natural disaster or demographic change that results in a company losing business. This can affect the value of your investment.

3. Political Risk. This is the potential for a government to pass a law or take an action that hurts your business. For example, if a country were to nationalize all the transportation and energy companies in the name of “national security” you could lose all the value of those investments.

The interesting thing about these risks is they are risks if you have all your money in the U.S. too!

Just because you have all your money in the U.S. doesn’t mean political, market, or currency risk goes away. It actually increases!

Having some of your money in foreign stocks decreases your risk.

Have a great week, and I’ll talk to you again soon!

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