Buying international stocks and shares sounds exciting. Tracking down businesses in emerging markets, or buying a portion of tech giants in the US, has a thrill that buying stocks in Greggs or HSBC just doesn’t have.
But as I’ve pointed out before: I know that if investing seems exciting, then I’m probably doing it wrong.
Is buying stocks in international businesses dangerous, or does it help diversify your portfolio and improve your chances of reaching rapid growth?
Let’s take a look.
The case for going international
There seem to be two main reasons why people buy international stocks.
The first is normally to add diversification to their portfolio. The argument is that if a geopolitical incident happens, it can slow down the local market and economy. At this point, Brexit might be shown as an example.
The other reason is rapid growth. If we look at the US, a company’s growth can accelerate much faster than it usually does in the UK.
We have seen this happen time and again with the big tech giants, like Facebook and Uber.
The same can be said of retail businesses. The US often has better conditions for growth than the UK as the last few years have shown. Buying international stocks is a no brainer then. Right?
FTSE 100
There is another way to look at it. The businesses in the FTSE 100, which is a collection of the UK’s top 100 listed companies, obtain a chunk of revenue from international markets.
This is why a fluctuation in the value of the pound can sway the market.
If you buy a FTSE 100 index fund, you will have a fairly big element of exposure to markets outside of the UK.
Currency fluctuations
Through buying a portion of a company domiciled outside of the UK, you will have to take note of the local currency exchange rate.
It’s like going on holiday: a strong pound — or weak local currency — will help you buy more.
If you have a position in an international business, you will need to take an interest in the exchange rate. This is crucial if you convert your position back into pound sterling.
A change in the value of your holding may be down to currency fluctuations, rather than the market valuation of the company.
Growth?
I don’t think that buying international businesses is necessarily a mistake, but I think it is important to be very careful.
I have more confidence in buying UK businesses. They are easier to visualise. Take a stroll down your local high street, and you’ll probably get an impression of what companies are doing well.
If it’s growth you are after, it may be worth considering the FTSE 250. This index sits below the FTSE 100, and contains the next 250 largest listed companies in the UK.
Some of these businesses might have more scope for rapid growth, without the headache of looking at international firms.