Many investors stay close to home and miss out on companies that dominate major industries.
Surprisingly, there's a huge segment of the market that many investors overlook entirely when building their investment portfolio. And it's not some obscure sector, like timber or nuclear power, it's one of the largest and most important areas of the entire global stock market.
I'm referring, of course, to shares in overseas companies. For many of us, our investment horizons are restricted to UK-listed companies. German companies, anyone? French? American? "Er, no thanks," seems to be a common response.
Why do so few investors venture into foreign investment waters? No doubt much of their reluctance comes from a lack of knowledge of foreign markets. In investing, sticking to what you know -- and understand -- is always good counsel.
But by passing over this segment of the market, investors are only hurting themselves. The majority of the overall global stock market capitalisation lies overseas -- and by only investing domestically, investors are constraining the investment opportunities from which they can benefit.
Going foreign
For a start, foreign markets can provide additional sources of returns if the domestic economy falters. It's true that global markets are more highly correlated now than they were 15 or 20 years ago, but they still offer important diversification benefits. Wouldn't you rather have exposure to 10 or 12 foreign countries, rather than hang all of your hopes on the UK stock market?
To be sure, there are obvious downsides, and that diversification comes at a price. Currency movements, for one. Your foreign stock goes up 5%; the pound goes up 10% -- if you sell, you're losing money. Overseas markets have varying degrees of oversight, too. I won't be buying any Russian shares for a long time. And there are tax complexities to take into account as well. Ten years ago, I had an American brokerage account, and lost money to America's withholding tax when I forgot to file a return on time.
Nevertheless, there are some superb foreign companies out there -- companies like Nestlè, Toyota, Coca-Cola and Procter & Gamble, for instance. And in today's economy, if you are an intermediate/long-term investor, it just doesn't make sense not to invest in such businesses. The good news: doing so is now easier than ever.
Taking the plunge
To start with, some foreign shares -- mainly American and European ones -- can be bought without venturing overseas at all. Banco Santander, Coca-Cola, Aer Lingus, Bank of America, Boeing -- all these and more are quoted in London, on the London Stock Exchange.
Be warned, though, that it's not straightforward. Some obvious companies don't have London listings (Procter & Gamble, for instance), while others have 'secondary' listings which means that retail investors may struggle to get a price. Coca-Cola and Boeing, for instance, have secondary listings, while Bank of America has a primary listing.
Another option is to let someone else deal with the hassle. Many investment companies offer global equity funds. To be sure, being global, they have a proportion of their assets in British companies as well, but the majority of their picks are likely to be America, European, and Far Eastern companies.
To the extent that their holdings are in Britain, you're of course paying someone else to buy shares that you could certainly buy yourself -- but it's still an easy, relatively inexpensive and reasonably diversified way into foreign equities.
Mark Dampier at Hargreaves Lansdown, for instance, has a particular liking for the JM Finn Global Opportunities Fund. 30% of its investments are in the UK -- but usually in companies with an overseas exposure, such as BP (LSE: BP) and National Grid (LSE: NG) -- with the rest spread across markets such as the US, France, Canada, India, Brazil and Singapore. "There's an interesting urbanisation slant to the fund, as well," he enthuses.
ETFs are another option. The iShares MSCI EAFE Index Fund, for example, invests in Nestlè, Total, Toyota, Roche and Novartis.
Going direct
Direct investment is another option, as today's generation of execution-only brokers permit private investors to buy shares directly of foreign exchanges. The Motley Fool ShareDealing service, for example, provides direct access to shares on all three New York exchanges (NYSE, Nasdaq and Amex), as well as the Paris, Brussels Amsterdam, Milan and Frankfurt markets, all for a flat-rate dealing cost of £17.50 per trade.
While you won't be able to buy every share listed on those markets (there's a stipulation that they must be continually priced, and over 50,000 shares are traded each day) in practice you'll get access to most of the shares that you're likely to be interested in. There's no automatic dividend re-investment, but dividends are credited to your account in sterling, minus any applicable taxes -- such as America's withholding tax.
Interestingly, too, the American markets provide access to shares quoted elsewhere -- such as the Far East. Among the world's automobile manufacturers, for instance, Toyota has much to recommend it. Sure enough, it's quoted on the New York Stock Exchange.
Finally, a word of caution: Foreign markets are just as vulnerable to bear markets as our own UK market, and the added element of currency movements makes overall returns difficult to predict.
So while it makes sense for investors to at least have some international exposure, don't go overboard. But by not avoiding foreign stocks entirely, you'll be further ahead than most retail investors, who resolutely stick to London-quoted shares alone.
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