Thinking of Investing Overseas ? If you are then please take into account the additional Risk and Return your portfolio will be subject to. It is often said that “Risk is the uncertainty that an investment will earn its expected rate of return.”
Typically, individual investors think of risk as the possibility that their investments could lose money. They are likely to be quite happy with an investment return that is greater than expected – however, since risky assets generate negative surprises as well as positive ones, defining risk as the uncertainty of the rate of return is reasonable.
The majority of investors focus on fluctuations of the capital value of an investment, when often they should be as concerned with the yield of an investment – particularly if they are reliant upon taking a regular income from their investments.
As we have stated in previous blogs, many investors react poorly to capital fluctuations and often sell off investments that are showing a capital gain and hang onto investments at a loss “as they will eventually come good”, whereas they should, if anything, be doing the reverse.
While many investors accept and understand risk, very few realise how risk is affected, when they invest overseas. When you invest in Japan or China or any other foreign domain you are increasing the risk and return characteristics of your investments, as you are adding an overlay of currency risk.
This happens even if the investment is denominated in £, the fact that an overseas investment may be denominated in £ is largely irrelevant as you will be invested in the currency of the country in which you have invested.
Clearly investing in an offshore investment will increase your overall risk and return, it is important to understand this.
If I can provide you with a tip, it is this, try as far as possible to make an investment with a strong currency into a weaker currency, particularly if the currency differential is a temporary one. It is even better to invest in a weaker currency with a “cheap” by relative terms stock market.
Currently Japan and China are supposed to be “cheap” and Europe is 20% below the level it should be by normal market averages.