Global investments can help you achieve your financial goals — but planning for different taxes, regulations, and currencies is key for success.
Diversifying your investments to include global markets can help you achieve your financial goals — but navigating the regulations, taxes, and currencies in other countries can be tricky.
So how do you find the right global investments and define risk management strategies that provide the opportunity to maximize returns based on your life and financial goals?
Rob Basham, Senior Vice President and Southwest Regional Manager for Regions Asset Management, offers the following tips to help families navigate global investment decisions.
1. Identify your financial goals and life priorities.
Basham suggests starting with a plan that considers your family’s circumstances and your ultimate goals: Where do you live now? When and where do you want to retire? Whom in your family do you want to provide for in the future, and how? “What do you want this money to do?” Basham asks. “Let’s talk about every scenario and goal and get the detail behind them to figure out the best way to get there.”
For instance, if you’ll be retiring in France or Germany but will be paying for your children to go to college in the U.S., you may want to make investments that pay dividends in euros and dollars.
2. Consider risks related to regulations and transparency.
The United States has some of the lowest fees, highest transparency, and tightest regulations of any market, Basham says, but it’s important to understand that every country has different rules and regulations. The International Organization of Securities Commissions (OICV-IOSC) — which sets global standards for the securities sector — has lists of foreign securities regulators that are members of the IOSC, as well as a database of alerts from members about investment firms that are not authorized by that regulator and may be scams. Consulting the IOSC lists and database can help you navigate regulatory and transparency issues when investing abroad.
3. Take into account transaction fees, currency exposure, and taxes.
It’s also important to take into account the costs and fees associated with global investments. For instance, there may be additional transaction fees due to international wire transfers or higher brokers’ commissions.
Currency exposure will also affect your returns. Basham provides an example of a married couple who live and work in the U.S. but plan to retire in an EU nation. Their assets, mostly U.S. securities, are dollar denominated. Even if the investment return in U.S. dollars is positive, the value of the portfolio in euros could erode if the euro strengthens against the dollar. In this situation, Basham would recommend the couple consider significant investment in the euro zone.
Finally, taxes may affect your dividends. The United States has income tax treaties with more than 60 countries and estate and gift tax treaties with a smaller number of countries that may reduce your tax rate or exempt you from paying U.S. taxes if you live overseas and pay taxes in another country.
4. Embrace a long-term view.
Compared with domestic investments, foreign investments involve new variables, such as currency exposure and different regulatory risks, that don’t apply domestically. Basham tells clients to take the long view of their financial goals and advises diversifying investments to mitigate risk and ensure your portfolio has exposure to different economies and sectors.
“One of the interesting things about investing in foreign assets is that returns can’t be controlled or accurately predicted over short periods of time,” he notes. “But the risk can be mitigated if you have a detailed investment plan that accounts for what you do know — known taxes, known currencies, and known locations.”
