Risks of International Investment

Even though investing abroad can prove to be profitable in the long run, there are quite a few risks of international investment to be considered before investing internationally. Risks are part and parcel of the game, but to be aware of it helps to plan ahead and mitigate them as far as possible. An important aspect of international investment is that with time volatility tends to decrease, as previous records have shown. So it is best to for an international investor to be ready with some long-term plans spread over a period of five to ten years in order to decrease the risk of loss due to a slump in markets.

Some other risks that need to be kept in mind while investing abroad are as follows:

1. Correlations Between International and Domestic Markets: 

It is generally believed that there is little correlation between domestic markets and international ones, which is actually beneficial to the investor investing abroad. However, recent trends show that these correlations are increasing. Moreover, these correlations seem to increase during down markets and decrease during up markets. This is rather troubling since it would benefit investors if during a slump in domestic markets the international market performed differently! What's more, it appears that this trend may actually be more prevalent in established markets than in emerging markets.

2. Higher Costs:

Investing in foreign markets can involve higher costs for the investor due to higher transactions costs for commissions, market impact cost etc. and higher portfolio management cost because of greater cost of research and so on. This can have an adverse bearing on the investor's returns. One should also be vary of investment taxes and other unexpected taxes in foreign countries. Even currency fluctuations can sometimes prove to be expensive for the international investor.

3. Investor Psychology:

In any investment the investor's psychology plays an important role. In international investments if an investor can hold on to their investments for a

longish period instead of locking in their losses by selling early, they'll benefit from the discipline. Traditionally most investors believe that international markets are not volatile, but one is likely to incur losses. It is true that volatility does exist, but it can be mitigated through diversification in international mutual funds. Over-cautious investors, when they see a loss in an international investment, sell it sooner than they would sell an investment with similar risk level in a domestic market. An investor should look at his entire portfolio before making hasty decisions, especially if the domestic market is going strong. It is a mistake to view international investments in isolation.

The key to investing in foreign markets is to develop a strategy an investor will be comfortable with and not abandon prematurely. This will also depend upon an individual's ability to accept day-to-day fluctuations, some of which may not be in one's hands at all.

Barriers to International investments:

1. Information barriers: Language differences, different accounting standards and methods, and high cost of sources of information on companies in some markets are information barriers to investment.

2. Political and capital control risks:

Investors in other countries like to ‘face’ known legislature and jurisdiction whereas in international issues they perceive a risk of lack political and capital control.

3. Foreign exchange risks: Capital invested and returns thereof are in one currency. The value creation, however, using that capital is in different currency. Hence either the issuing company or the investors are prone to make losses on account of forex risk.

4. Restriction on foreign investment and control: Some countries impose restrictions on foreign investment to protect their domestic industry and money markets.

5. Taxation: Difference in tax laws in various countries fetches different returns to the investors of different residential status.

Conclusion We are not lawyers, tax accountants or offshore investment experts in any country. Every individual's situation is different. Offshore investment is beyond the means of most investors, and above the risk tolerance of others. 

Despite the many pitfalls of offshore investing, it can still pay off to shift some investment assets from one jurisdiction to another. As with even the most insignificant investment, do your research before parting with your money - unless you're prepared to lose it.