An excellent idea and the first of our three reasons to diversify your investments offshore is to avoid having all your investment denominated in US dollars.

The second of our three reasons to diversify your investments offshore is that, if you are from North America, Europe, or Japan, there are faster growing economies and faster growing markets than back home.

The third of our three reasons to diversify your investments offshore is to look for a tax haven or two. It is certainly possible to bank, set up a business, have a retirement, and/or retire offshore. There are many so called tax havens in the world. The term, tax haven, means that a country offers a set of tax advantages. Not all are alike.

With the dollar on the decline, the US stock market weakening and a trade war looming, how can you investing foreign companies or other foreign assets in order to diversify your investment portfolio?

Multinationals

The easiest way to get a piece of the action offshore and never leave the US market is to invest in multinational companies like 3M, Procter & Gamble, or Coca Cola. By investing in highly diversified companies like 3M, consumer goods companies like P&G, or a beverage giant like Coca Cola you also can avoid the pain awaiting the high tech darlings as the market corrects.

Direct Investment in Foreign Companies

The big money goes for foreign direct investment. Even if you do not have the capital to invest directly in projects offshore it is instructive to see where the smart money is going.

Follow the money is age old advice for knowing why something is happening. In this case we would like to follow the money that goes into foreign direct investment. Foreign direct investment is done by folks with lots of money and the intention to stay a course and make a profit. If you are looking for offshore investment ideas, take a look at where foreign direct investment goes year after year after year. There have been changes afoot regarding where foreign direct investment is going. A very useful reference in this regard is the just published United Nations study, World Investment Report 2013. We have used 2007 and 2012 as bookend comparison years as 2007 was just before the onset of the worst recession in three quarters of a century and 2012 is the most recent year reported.

The most recent report is 2017. Take a look to see where people in the know are investing offshore.

American Depositary Receipts

You probably do not speak Portuguese, German, or Japanese. And you probably are not going to fly to another country to check out the investment opportunities. Likewise, you are not going to be able to deal directly with a stock broker who does not speak your language. But, there is a solution for how you can invest in foreign companies and that is to use American depositary receipts. These are negotiable certificates issued by US banks. Each certificate represents shares in a foreign company. The beauty of using this vehicle to invest in foreign companies is that they are like buying US stocks and provide the same sort of information that you expect from a US company listed on the NYSE or NASDAQ.

Business risk is the risk of competition. Effectiveness of management, developing and promoting products, penetrating markets, and doing so in the most cost effective and profitable manner all go into a profitable company. Business risk is also economic risk. Macroeconomic circumstances such as recessions and wars can devastate otherwise thriving businesses. New scientific discoveries or new technologies can likewise create new winners and losers. Diversification helps in managing investment risk. Consumer product companies typically do better during a recession than oil companies. Owning different types of stock in several market sectors will protect you from an isolated market downturn in one sector.

Fundamental analysis of stocks includes a careful look at price to earnings ratios and cash flow ratios. These details will tell you if a stock is overpriced or underpriced. They will tell you how effectively the company is using its cash flow. Fundamental analysis of a stock will tell you if it is a good buy or if its success has caused it to become overpriced. Many companies have their day of rapid expansion and eventually grow to a size that inhibits spectacular growth. They are typically priced in anticipation of future earnings. Managing investment risk in buying stocks has to do with not overpaying for popular stocks on the one hand and finding underpriced stocks on the other. It also has to do with being able to define investment risk.

Investment risk management probably best starts with having a clear idea of what your investment goals are and developing an investment plan consistent with your goals. There are many stocks that have appreciated in value over many years. Long term investing is best served by finding underpriced stocks with good prospects, buying and holding. However, almost all stocks suffer when there is a market crash. If your goal is to make a certain amount of money in a few years you may be disappointed when the economy turns sour just when you want to sell and take profits. Managing investment risk for short term goals is easier with trading options where there is profit in both the rise and fall of stock prices. Knowing what penny stocks to watch for short term gains may be a better idea in a volatile market where you want to keep your gains as cash.

Investment risk management works best when you don’t let everyone else’s mood affect yours. Polls tell us that the American public is very pessimistic about the economy despite the fact that the economy is improving, retails sales are coming back, and manufacturing is picking up. Whether you are investing in oil, investing in gold, or investing in beer companies keep your eye on financials and fundamentals as your guide to managing investment risk.

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