The increased globalization of the economy has led to more people and businesses making cross-border investments to seek diversity and growth opportunities.
But in addition to the benefits of cross-border investing there are also greater risks such as the possibility of differences in tax laws and/or regulations and currency risks, which can be a challenge to effectively manage cross-border investments.
Therefore it is essential to understand all the complexities involved in cross-border investing and develop an effective strategy for managing those complexities. Below is a guide outlining the steps to follow to effectively manage cross-border investments so that they align with your financial goals and risk tolerance and are at a minimum exposed to international risks.
1) Manage Your Exposure to Currency Risk
Currency risk is one of the greatest risks associated with cross-border investments. The value of your investments can fluctuate significantly due to dramatic fluctuations in exchange rates.
To mitigate this type of risk consider hedging your currency risk through financial instruments such as currency futures, currency options or currency ETF’s.
In addition, consider reducing your currency exposure by investing in foreign currencies and holding foreign currency accounts.
Monitoring exchange rates and making informed decisions regarding whether to exchange currencies or adjust your portfolio based upon currency fluctuations will assist in protecting your investments against significant loss.
2) Navigating International Tax Laws and Double Taxation
Cross-border investing typically creates tax complexities for investors. Each country has its own tax laws that can affect both the income generated from international investments and any capital gain realized from international investments.
To avoid double taxation research the tax treaties between your home country and the country where you are investing.
Consider utilizing tax efficient accounts, such as international retirement accounts or tax deferred investment vehicles, to minimize tax liabilities.
Consult a tax professional that specializes in international tax law to ensure compliance and to create an optimal plan for minimizing tax liabilities.
Knowing the tax regulations will enable you to create a framework for structuring your international investments that minimizes unnecessary tax liabilities.
3) Utilize Diversification to Reduce Exposures to Geopolitical and Economic Risks
When you invest internationally you expose yourself to new types of risks including, but not limited to, political instability, economic downturns, or changes in policy in foreign countries.
Geographic diversification will assist in spreading the risk of downturns in foreign markets throughout various regions thereby minimizing the potential negative impact of a downturn in any single country.
Concentrate your investments in countries that possess strong economic fundamentals and are characterized by political stability and well developed and predictable legal systems.
Be vigilant and monitor global events to be aware of potential risks to your investments such as trade wars, sanctions or national elections.
By diversifying your investments among various geographic regions you will reduce the level of exposure to specific country-based risks.
4) Leverage Global Investment Vehicles
There are numerous investment vehicles that allow you to effectively manage cross-border investments with reduced complexity and lower costs by providing exposure to foreign markets.
Mutual funds or ETF’s focused on international investments allow you to invest in a large number of foreign assets without having to actively manage each asset individually.
Global bond investments provide exposure to foreign debt markets and generate income through interest payments.
International REITs (Real Estate Investment Trusts) provide you with the opportunity to invest in commercial and residential properties located outside of your local area.
Using global investment vehicles can simplify the management of cross-border investments and allow you to easily access foreign markets.
Conclusion
Effectively managing cross-border investments requires a thoughtful approach to currency risk, taxes, diversification and global investment vehicles. Understanding the unique risks and opportunities of international investing allows you to make informed investment decisions that are aligned with your long term financial objectives. Ongoing diversification, tax planning and regular monitoring of your international investments will allow you to maintain profitability and achieve your long term objectives.