3

I noticed something odd: Whenever people talk about investing in stocks or even when they talk about investing in ETFs, they talk about companies in their own country.

I'm thinking about buying index funds myself right now. I live in Germany. But why would I invest into something in Germany or Europe? My ability to earn money through work will probably decline if Germany's economy takes a hit. If Germany's economy takes a hit, so will Europe's economy. Therefore I should invest in stuff on other continents to increase my odds of being well off financially.

I don't see why this would lower my expected earnings but I think it would reduce the risk involved.

What are the flaws in my logic? (I only care about index funds and stocks, not investments like houses.)

  • Not a direct duplicate, but consider this question and it's well-formed answer: money.stackexchange.com/questions/56077/… – Grade 'Eh' Bacon Sep 18 '19 at 19:04
  • 1
    You add exchange rate risk if you venture into other markets with an ETF that's not euro-hedged. If the euro increases to (say) 1.50 USD and the US market declines by 20% (which could be correlated) you've lost almost 50%. Presumably you need Euros to pay your bills, not USD, RUB or CNY. – Spehro Pefhany Sep 18 '19 at 19:11
  • @Grade'Eh'Bacon Thank you. But the answer there doesn't seem to explain why people invest locally. It only tells the OP of that question not to. If it was a stupid move only to invest locally, wouldn't people advise against it in a more popular format? Besides, the answer seems to contain a flaw which I pointed out in the comments. – UTF-8 Sep 18 '19 at 19:13
  • @UTF-8 As I said, not a complete duplicate, but a good start I think. – Grade 'Eh' Bacon Sep 18 '19 at 19:38
5

Investing in other countries adds additional risks to your portfolio. Most obviously currency risk. Yes investments may have better returns in other countries, but that doesn't help as much if that currency is weakening, since when you cash out you'll get less of your home currency back.

For most people, it makes the most sense to invest in their home currency since that's where they'll need their money to be when they cash out. That said, you can still invest in foreign markets through ETFs in your home currency that are currency-hedged. This question addresses Germany specifically.

Therefore I should invest in stuff on other continents to increase my odds of being well off financially.

You're only thinking about one side of it - what happens if your economy doesn't decline (or even grows?) Then you'd be introducing a risk that isn't necessary. If you're worried about the economy tanking and you losing your job, then move to another country. But I don't think that's as big a risk as you perceive it to be.

|improve this answer|||||
  • Moving to another country isn't generally possible or at the very least extremely complicated. Most countries don't have easy immigration policies. – xyious Sep 19 '19 at 18:55
  • 1
    @xyious Fair enough, and that was meant to be more tounge-in-cheek than it seems. I was more reacting to the premise that investing in another country is going to save one from a local economy collapse. – D Stanley Sep 19 '19 at 19:31
1

Asking "Why do investors invest in 'XYZ' style" is often a matter of soliciting opinions, so I don't pretend to be comprehensive in this answer. By way of disclaimer: this answer is also not professional advice - consult an appropriate professional for that.

However, if we look at how people invest, here are some of the things we see:

  • access to markets: not all brokers make offshore stock exchanges available to their clients;

  • cost of access: even if a broker provide access to overseas stock exchanges, it can cost several times more in brokerage fees to invest in an offshore stock than to invest in a local stock;

  • time zones: depending on where you are and where the offshore market is, their trading hours might coincide with sane sleeping hours in your own locale; and

  • familiarity: this cuts both ways, but aside from companies with global or at least intercontinental reach, people will tend to be more familiar with local companies than non-local companies.

Working with multiple currencies also plays a part. Aside from the currency risk that others have mentioned, if you invest in shares that are traded in non-local currencies, you encounter the hassles of FX: opening FX accounts, accounting for FX gains and losses, and possibly even make your tax returns more complex.

Depending on the requirements of the stock exchange's country, you might also need to interact with foreign bureaucracy and perhaps tax and legal matters. If the two countries have different financial years, end-of-financial-year reports might come out at an inconvenient time for you. And if you make gains, there may be withholding tax etc.

None of this is insurmountable, but investment is already a complex thing, so extra hassles (such as those associated with offshore investments) tend to make investments less attractive.

|improve this answer|||||
0

If you thinking of investing money into the emerging market, the foreign exchange risks are indeed clear and imminent. Unless you are hedge fund manager that using other people money to speculate the emerging market, otherwise you will have a higher chance to lose big in the long term.

Following are some reason that will lead less return in emerging country compare to industrial country:

  • Poor institution that leads to poor production efficiency
  • Stock indexes are compromised of mostly rent-seeking oligarchy industry.
  • Poor regulation. Lots of pump and dump scheme that distort the market.
  • Poor industries spread. Many emerging economies banking industry index is many thousands of times than another industrial index.
  • Price Keep operations (PKO) , this will further distort the market
  • Industrial lack of innovation and can be easily replaced by more competitive import
  • Emerging market stock always over-valued by local analysis by comparing similar company P/E with the industrial country company

Yes, the emerging market ETF price attractive, but if you looking for the long term, one will notice the emerging market is always lagging behind the industrial country market after an economic setback due to poor industries fundamental.

Here are more interesting reading :

|improve this answer|||||
0

You are totally correct that investing into the economy of the same country/region you're living in is extra risky because your personal circumstances might correlate with that investment – if you put your eggs in one basket, there's a higher chance that you'd lose both compared to keeping them separate.

It is therefore extremely sensible to spread your investments across as many regions and industries as possible. Diversify as much as possible! You do not know up front which will be winners and which will be losers. The only principled approach for a non-professional investor is to invest into funds that track a broad, worldwide index.

Note that the German stock market has not seen very attractive returns when compared internationally. (There are also hilarious anecdotes about the purported safety of investing in reputable German companies.) Note also that roughly half of the worldwide stock market is in the US. You would be completely missing out on exposure to that if you were to focus on German or EU stocks. “Only invest into your own country” might be reasonable for an US investor, but it is unnecessarily risky in any other country. You cannot apply US financial advice directly to your circumstances.

For retirement-oriented savings, currency risk is an important concern: what good is a nominally well-perfoming investment if it is worthless in the currency you have to pay rent in?

But it would be foolish to let that discourage you from properly diversifying your investments. Instead:

  • you can accept the currency risk, e.g. from the (arguable) belief that the USD:EUR exchange rate will be stable in the long term
  • you can use currency-hedged funds. Of course, currency hedging is not free and will result in lower expected returns – you have to find the correct risk vs returns balance for you.
|improve this answer|||||
  • I don't understand why the currency the fund is denoted in would change anything. Isn't the exchange rate essentially multiplied with when the fund is populated with stocks and divided by when I put money in or out? Sure, the numbers on the graph look different, but it shouldn't it just be the graph of an otherwise identical fund denoted in EUR multiplied with a graph of the USD/EUR exchange rate? – UTF-8 Sep 19 '19 at 9:56
  • @UTF-8 Thanks, I removed that from the answer. The currency that a fund reports in is irrelevant, as you've correctly argued. – amon Sep 19 '19 at 15:36

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.