Podcasts > Money Rehab with Nicole Lapin > Economy Anxiety? Here's How to Invest in Foreign Markets

Economy Anxiety? Here's How to Invest in Foreign Markets

By Money News Network

In this episode of the Money Rehab podcast with Nicole Lapin, the topic of investing in foreign markets is explored. Lapin discusses options for investing in safer, more stable markets like Japan and Germany, as well as higher-growth but more volatile emerging markets like India and Mexico. She covers various ways to gain international exposure, including ETFs, American Depositary Receipts (ADRs), and foreign bond funds.

The episode also delves into tax considerations for international investments, including capital gains taxes, foreign tax credits, and the reporting requirements for direct foreign holdings. Lapin suggests ETFs can provide diversification while avoiding some of the complexities of direct foreign investing.

Economy Anxiety? Here's How to Invest in Foreign Markets

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Economy Anxiety? Here's How to Invest in Foreign Markets

1-Page Summary

Foreign Investment Options: Safer vs Riskier Markets

According to the podcast, international investors can choose safer, stable foreign markets like Japan, Germany, Switzerland, and Canada - characterized by political stability, diversified economies, and strong investor protections.

Alternatively, Lapin notes that emerging markets like India, Mexico, Indonesia, and Vietnam offer higher rewards but greater volatility. They present attractive growth narratives but require careful due diligence.

Accessing Foreign Stocks and Bonds

ETFs for Diverse Exposure

Lapin recommends ETFs as an easy way to gain exposure to international stocks. Options like VXUS and EFA cover developed markets, while EEM and VWO track emerging markets.

ADRs Offer U.S. Access to Foreign Firms

American Depositary Receipts (ADRs) allow U.S. investors to own foreign company shares traded on U.S. exchanges in U.S. dollars, following U.S. regulations.

Foreign Bond ETF for Low-Risk Investments

For lower risk, Lapin suggests the Vanguard Total International Bond ETF (BNDX) with government and corporate bonds from developed countries.

Tax Considerations for International Investing

Foreign Investment Gains Taxed Like U.S. Gains

Lapin warns that capital gains from international investments are subject to U.S. capital gains taxes, just like domestic investments.

Foreign Tax Credits Offset Withholding Taxes

Some countries withhold taxes on dividends before payout, but investors can claim foreign tax credits on U.S. returns to offset this withholding.

ETFs Avoid Complex Foreign Tax Reporting

Direct foreign investments may require extra tax reporting like FBAR and FATCA. Lapin suggests U.S. ETFs with international holdings can provide diversification without this complexity.

1-Page Summary

Additional Materials

Counterarguments

  • While safer markets like Japan, Germany, Switzerland, and Canada are generally stable, they can still be affected by global economic downturns, geopolitical events, or internal issues that could impact investor returns.
  • Political stability, diversified economies, and strong investor protections do not guarantee investment success; market performance can still be unpredictable due to a variety of factors.
  • Emerging markets may offer higher rewards, but they can also be subject to abrupt policy changes, currency fluctuations, and other risks that can erode returns quickly.
  • Careful due diligence in emerging markets is crucial, but even thorough research may not fully protect investors from unforeseen market shifts or local issues.
  • ETFs provide diversified exposure, but they also come with management fees and other costs that can impact investment returns over time.
  • ETFs may not fully replicate the performance of the underlying index or stocks due to tracking error, and they may also expose investors to liquidity risks.
  • ADRs offer convenience, but they may not provide the same level of exposure to foreign markets as direct investments, and currency risk is still a factor.
  • The Vanguard Total International Bond ETF (BNDX) may be lower risk, but bond investments can still be affected by interest rate changes, inflation, and credit risk.
  • U.S. capital gains taxes on international investments can reduce net returns, and tax laws are subject to change, which could affect future investment decisions.
  • Foreign tax credits can offset withholding taxes, but there may be limitations and complexities in claiming these credits that can affect their benefit.
  • While U.S. ETFs with international holdings can simplify tax reporting, they may not provide the same level of direct exposure to foreign markets as owning individual foreign stocks or bonds.
  • Diversification through ETFs does not eliminate market risk, and investors may still experience losses if the overall market declines.

Actionables

  • You can create a balanced investment portfolio by allocating a specific percentage to stable markets and a smaller, calculated percentage to emerging markets. Start by deciding how much of your investment capital you're willing to risk for higher returns. For example, you might allocate 70% of your international investment to stable markets like Japan and Canada, and 30% to emerging markets like India and Vietnam, adjusting the ratio based on your risk tolerance and investment goals.
  • Develop a checklist for due diligence when exploring emerging markets to ensure you understand the risks and opportunities. This checklist could include factors such as the political climate, economic growth projections, currency stability, and market regulations of the country. Before investing, research each item on your checklist for the specific emerging market you're interested in, using resources like financial news websites, market analysis reports, and economic data from international organizations.
  • Utilize tax-advantaged accounts for international investments to potentially reduce the tax burden. Investigate options such as Individual Retirement Accounts (IRAs) or 401(k) plans that may offer tax benefits for holding international investments. By placing international ETFs or ADRs within these accounts, you might defer or minimize taxes on dividends and capital gains, depending on the account's tax treatment. Always consult with a tax professional to understand the implications and ensure compliance with IRS rules.

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Economy Anxiety? Here's How to Invest in Foreign Markets

Overview of Foreign Investment Opportunities

Investors looking beyond their national borders have a diverse range of options to consider, from the safety of blue-chip markets in established countries to the enticing but volatile emerging markets.

Safer, Stable Foreign Markets Offer Lower Risk, Consistency

Countries like Japan, Germany, Switzerland, and Canada represent safer foreign markets for investment. Their attractive qualities include stable political systems, diversified economies, and strong legal protections for investors, providing consistency and lower risk.

Japan's combination of tech innovation, industrial strength, and investor protections makes it an appealing option. During times of economic uncertainty, the yen becomes a haven for investors. Warren Buffett's Berkshire Hathaway exemplifies confidence in Japan by purchasing shares in five major Japanese companies with the possibility of increasing that stake in the future.

Germany, as the European Union's economic powerhouse, boasts a robust manufacturing sector and an export-driven economy, underpinned by a longstanding reputation for fiscal responsibility.

Switzerland's stable government, strong financial regulations, and economic consistency anchor it as a choice investment location, with neutrality extending beyond politics into fiscal matters.

Canada, with its strong banking system, resource-rich economy, and proximity to the U.S., is an excellent choice for first-time international investors. Its economy does face challenges, such as recent tariff complications, but overall Canada remains a reliable marketplace.

High Rewards but Greater Volatility in Riskier Emerging Markets

High-Risk, High-Return Emerging Markets: India, Mexico, Indonesia, Vietnam

On the other hand, emerging markets like India, Mexico, Indonesia, and Vietnam offer higher rewards but come with greater volatility.

India, the fastest-growing major economy, has attracted investors' attention for its young population, ex ...

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Overview of Foreign Investment Opportunities

Additional Materials

Counterarguments

  • While Japan is known for its tech innovation and industrial strength, its economy has faced decades of stagnation and deflation, which could affect future growth prospects.
  • Germany's economy, while robust, is heavily reliant on exports, making it vulnerable to global trade tensions and economic downturns in its trading partners.
  • Switzerland's financial regulations and stability are strong, but the country's high cost of living and operation can be a barrier for some investors.
  • Canada's economy may be resource-rich, but it is also susceptible to fluctuations in commodity prices, which can lead to economic instability.
  • India's growth is impressive, but it also struggles with infrastructure challenges and regulatory hurdles that can impede business operations and investment.
  • Mexico's position as a manufacturing hub is advantageous, but it also fa ...

Actionables

  • You can diversify your investment portfolio by allocating a portion of your funds to a mix of stable and emerging market index funds. By choosing index funds that track the performance of markets in countries like Japan, Germany, Switzerland, Canada, India, Mexico, Indonesia, and Vietnam, you spread your risk and potential for returns across different economic sectors and levels of market maturity. For example, you might invest in a Japanese technology index fund for stability and innovation exposure, while also putting money into an Indian market index fund to capitalize on its growth potential.
  • Start a monthly investment club with friends or colleagues to collectively research and invest in international stocks or funds. Each member could take responsibility for analyzing a different country's market, using the criteria mentioned such as political stability, economic diversification, and legal protections for stable markets, or growth potential and consumer markets for emerging economies. This collaborative approach allows you to pool knowledge and resources, potentially reducing individual risk while gaining exposure to a variety of global investment opportunities.
  • Use a robo-advisor platform that offers international investment options to create a personalized, globally d ...

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Economy Anxiety? Here's How to Invest in Foreign Markets

Investment Vehicles For Accessing Foreign Markets

The podcast discusses various methods that allow investors to access and invest in foreign markets.

ETFs Provide Diverse Exposure to Foreign Stocks

Exchange-traded funds (ETFs) are presented as an easy and popular method for gaining exposure to international markets. They provide a diversified portfolio of foreign stocks in a single transaction.

International ETF Options: VXUS, EFA (Developed Markets); EEM, VWO (Emerging Markets)

Investors looking to access safer developed markets might consider ETF options such as the Vanguard Total International Stock ETF (VXUS) or iShares' equivalent (EFA). For those interested in emerging markets, which entail higher risks and potential rewards, options include the iShares Emerging Market ETF (EEM) and Vanguard's equivalent (VWO).

ADRs Enable U.S. Investments in Foreign Firms

American Depositary Receipts (ADRs) offer a different mechanism for U.S. investors to own shares in foreign companies.

ADRs, Priced in U.S. Dollars and Following U.S. Regulations, Offer Access to Foreign Stocks

ADRs are shares of foreign companies that are traded on U.S. exchanges, allowing U.S. investors to buy foreign stocks without dealing with foreign exchanges. They are denominated in U.S. dollars and follow U.S. market regulations, simplifying the process for investors. Well-known companies such as Samsung o ...

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Investment Vehicles For Accessing Foreign Markets

Additional Materials

Counterarguments

  • ETFs, while providing diversification, may still carry country-specific risks and currency risks that are not eliminated by diversification alone.
  • International ETFs often have higher expense ratios compared to domestic ETFs, which can reduce net returns for investors.
  • The performance of ETFs tracking developed or emerging markets can be significantly affected by geopolitical events, economic policies, and market sentiment, which may not always align with an investor's expectations.
  • ADRs, while convenient, may not provide the same level of exposure to foreign markets as direct investments since they may represent only a limited selection of a foreign company's total shares.
  • ADRs may not perfectly replicate the performance of the underlying foreign stock due to currency fluctuations, and they may also be subject to additional fees.
  • Investing in foreign bonds through ETFs like BNDX exposes investors to interest rate risk, credit risk, and currency risk, whic ...

Actionables

  • You can diversify your investment portfolio by setting up a monthly automatic investment plan into an international ETF. Choose an amount you're comfortable with and set up a direct deposit from your bank account to the ETF. This method, known as dollar-cost averaging, can help reduce the impact of volatility in foreign markets and ensure you're consistently investing in a diversified asset.
  • Create a virtual portfolio to simulate owning ADRs before actually investing. Use a stock market simulator app to track the performance of selected ADRs over time. This hands-on approach allows you to learn about the nuances of investing in foreign companies through ADRs without risking real money. It's a practical way to gain confidence and understand the market dynamics before committing your funds.
  • Explore the potential of foreign bonds by using an online investment calculat ...

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Economy Anxiety? Here's How to Invest in Foreign Markets

Tax Implications and Considerations for International Investing

When it comes to managing your investment portfolio across national borders, it's critical to understand the tax implications that come with international investing. Lapin offers a sharp reminder and a valuable guide on how to navigate these often-complex waters.

Foreign Investment Capital Gains Taxed Like U.S. Gains

Investors Can't Evade U.S. Capital Gains Taxes By Investing Abroad

For U.S. investors looking at the international scene, Lapin warns that capital gains earned from the sale of international investments are subject to U.S. capital gains taxes just as gains from domestic sources are. This means that the dream of evading U.S. taxes on investment income by going overseas is just that - a dream.

Countries Withhold Taxes On Dividends Before Payout

Investors Can Claim Foreign Tax Credit On U.S. Tax Return to Offset Withholding Taxes

On another important note, Lapin points out that some countries implement withholding taxes on dividends before these payments are distributed to investors. However, due to tax treaties between the U.S. and various countries, investors might have the possibility to claim a foreign tax credit when filing their U.S. tax returns. This credit can offset the impact of the withholding taxes, ensuring that investors aren't double-taxed on this income.

Foreign Investments May Require Extra Tax Reporting, Such as Fbar and Fatca

Investing ...

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Tax Implications and Considerations for International Investing

Additional Materials

Counterarguments

  • While U.S. investors are subject to capital gains taxes on international investments, the rate of taxation and the definition of what constitutes a taxable event may differ from one country to another, potentially affecting the overall tax burden.
  • Some countries may not impose withholding taxes on dividends, or the rate may vary significantly, which could influence the investment decisions favoring countries with more favorable tax treatments.
  • The foreign tax credit is beneficial, but it may not always fully offset the impact of withholding taxes due to various limitations and caps, which can result in a higher effective tax rate on foreign income.
  • Additional tax reporting for foreign investments, such as FBAR and FATCA, can be complex, but it also serves to ensure compliance and transparency in international financial activities, which can be seen as a posi ...

Actionables

  • You can consult with a tax professional who specializes in international investments to help you navigate the complexities of foreign tax credits and reporting requirements. They can provide personalized advice on how to claim foreign tax credits effectively and ensure you're meeting all necessary FBAR and FATCA reporting obligations, potentially saving you time and reducing the risk of errors.
  • Create a spreadsheet to track your international investments, including the country of investment, dividend amounts, and taxes withheld. This will help you stay organized and have all the necessary information at hand when claiming foreign tax credits or preparing tax documents. By maintaining this record, you can quickly identify which investments have associated withholding taxes and how they impact your overall tax liability.
  • Educate yourself on the tax implications of different investment vehicle ...

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