Americans like to think that the United States is dependent upon no other country, that, if necessary, the U.S. can produce all the goods and services it needs within its borders. This belief arose during the early days of America when the Atlantic and Pacific Oceans made trade with Europe and Asia slow and torturous. Canada during those times was little more than a frontier, and Mexico had little money and few developed resources.
Times have changed. Since World War II the economies of individual countries have merged into continental economies, and from there have grown into a global economy. The American stock market crash on October 19, 1987, is dramatic proof of how intertwined the global economy has become. The effects of the crash didn't ripple around the world; they were a tidal wave. The connections between the world's markets were clear for everyone to see.
Since then, the ties between the world's economies have grown stronger. Part of the reason for this is the advance of electronic communications. An event 100 years ago that might have taken days to affect the world's economies now rushes around the world with lightning speed. Computers track markets constantly and detect the slightest fluctuations. What happens on Wall Street can affect markets in Tokyo, Bonn, and Sydney almost instantly. What happens in Singapore, Hong Kong, or London can push up or pull down the value of investments around the world. Investments everywhere are interconnected in a complex web of buying and selling that doesn't recognize the boundaries of countries. Investors -- whether they realize it or not -- have already gone global.
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Why Invest Abroad?
To limit yourself to merely investing in one country means greatly limiting your investment opportunities. International diversification provides a variety of potentially high-growth investment choices in stocks and bonds. If an American investor chooses to invest only in American companies, he denies himself the opportunity of investing in some of the world's leading companies.
Following is a list of products that are well-known in the United States. Many Americans believe they are produced by U.S. companies, but in fact they are manufactured by non-U.S. companies. The list includes:
- Aquafresh - Beecham
- Carnation - Nestle
- Close-Up - Unilever
- Dannon Yogurt - BSN
- Frigidaire - Electrolux
- Glidden Paint - Imperial Chemical
- Lean Cuisine - Nestle
- Panasonic - Matsushita
- Pillsbury - Grand Metropolitan
- Purina Dog Chow - British Pete
- Ragu - Unilever
- Sudafed - Wellcome
- Sunkist - Cadbury Schweppes
- Valium - Hoffman-La Roche
These are just a few companies. There are countless more. Consider the U.S. car companies. Much of Ford's yearly profits come from Europe. One of Ford's most popular cars is the Taurus; the engines of some Taurus's have been designed by Yamaha corporation of Japan. Ford's Mercury Tracers are built by Mitsubishi. The Ford Probe, although built in Michigan, is built by Mazda. Chrysler, too, is in partnership with Mitsubishi, which builds the Dodge Colt. The Japanese have owned car factories in America for several years, and the Germans are starting to follow their lead. When you drive your new "Made in America" car off the lot, you might be driving on Michelin tires.
Some companies -- Boeing, Ford, Citicorp, Coca-Cola, Philip Morris, McDonalds, IBM, and ITT, naming just a few -- are truly multinationals. They no longer depend solely on the U.S. economy. They belong to the world, deriving much of their profits from various countries.
The distinctions between companies and countries are blurring. The global market is here. The astute investor realizes this, and is taking advantage of it.
The global market presents investors with the opportunity to invest abroad and diversify. A diversified portfolio provides you with the chance to increase your overall return while reducing your risks.
Although major events tend to affect stock markets around the world, general trends among the various markets usually vary. For example, various stock markets may be moving up or down together, but long-term correlations are low. Seldom, for example, will the U.S. and Japanese markets move in tandem for any long period of time. Therefore, diversifying in various investments abroad will likely reduce the overall volatility and risk of your investments. Furthermore, international stock markets have performed well over the years. When compared to the U.S. stock market, international stock markets have outperformed the U.S. market over the long run and seemed poised to do so throughout the nineties.
The following list compares the annualized returns of the 15 top stock markets from 1982 - 1992:
Annualized Total Returns of Major Stock Markets
1982-1992 1. Hong Kong 25.5% 2. Belgium 25.4% 3. France 23.1% 4. Netherlands 22.1% 5. Spain 20.9% 6. Austria 20.3% 7. United Kingdom 17.9% 8. Sweden 17.6% 9. Switzerland 17.0% 10. Norway 16.5% 11. Germany 16.4% 12. Japan 16.4% 13. United States 16.0% 14. Australia 15.3% 15. Denmark 14.4%
In any given year, one country's stock market stock may outperform another. Seldom do the markets of the U.S. and other countries rise and fall together. To insulate your overall investment portfolio against the potential fall of any market, you must diversify your holdings.
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Taking the First Step
Although many investors can see the advantages of investing abroad, they may hesitate putting some of their money in an overseas investment. The reason is easy to explain. They are comfortable with the laws and investment choices of their own country. They are familiar with the economic policies, the customs, and the brokers and financial counselors they typically deal with. Many feel that it is easier to monitor and control their investments, and liquidate holdings quickly, if necessary, when those holdings are in their own country.
These would be sound reasons if the return rate on investments was equal among countries, but unfortunately, as noted, it is not. Some currencies are stronger than others; interest rates vary throughout the world; inflation is tame in some places while running wildly out of control in others; laws and regulations for banking and investment vary; and the political climate varies. There are also tax codes to consider. Some countries offer tax advantages in an attempt to attract foreign investment. Others have favorable interest and exchange rates.
Each nation has different regulations, tax structures, and exchange restrictions, along with national laws and customs. Before investing, you must compare the investment opportunities offered by other countries and find the ones that best fit your financial goals while at the same time offering solid returns and safety.
When considering any investment, you must always remember that there is a risk. There is a downside. Generally, the greater the risk, the greater the chance for potential growth. By being aware of the "traps" that you might slip into when making overseas investments, you will be more likely to avoid them. "Being forewarned is being forearmed" is an old saying that continues to be good advice.
Along with the usual pitfalls to avoid when considering any investment, such as choosing companies whose products will soon be obsolete, whose factories or equipment are outmoded, whose capital is limited, or whose management is not up to the task of managing and maintaining growth, there are four traps to be careful of when investing abroad:
- 1. You might invest in the wrong company.
- 2. You might invest in the wrong country.
- 3. You might invest in a company in a country that has the wrong currency.
- 4. You might become mired in a maze of international regulations that you find confusing and overwhelming.
You can avoid these traps by carefully screening companies, countries, and regulations. It's not as hard as you may think. Attentive appraisal of the conditions regarding your investment is necessary.
First, you must make sure that the company (or companies) you are considering is profitable or that it has a relatively high potential for growth. Find out as much as you can about its management. Are they forward-looking? Do they have the skills necessary for the company to be successful? What competition does the company face in its own country? In the world? Does it have a reasonable chance for success? Is your risk in investing in it balanced by the potential rewards?
Similarly, you must screen the country just as carefully. Is it stable? What type of government does it have? Democratic or autocratic? Democracies move slowly, but tend to be more stable than autocratic states in which leaders can enact fast policy changes, sometimes with the opposite results of what they intended. What are the people like? Is the populace educated? Does the populace have purchasing power? In other words, do the people have enough wealth to support the company's growth? Does the country welcome foreign investment? Is there a threat of nationalization or the freezing of foreign assets? Does the government of the country regularly manipulate markets? Is the so-called "playing field" level? Is it likely, given the country's economic and political climate, that the company will in fact grow?
You must also examine the country's currency. Is its currency stable? What is the currency exchange rate? Exchange rates fluctuate, and what might seem to be a good investment today may not be wise tomorrow. For example, during the 1980s the decline of the U.S. dollar, along with the growing economies of many other countries, was a boon to American investors who held investments abroad. However, if the dollar had risen instead, the value of investments overseas would have decreased because the exchange rates would require more of the foreign currencies to be exchanged for dollars.
Finally, you must educate yourself in the regulations governing the types of investments you wish to make. You might, of course, enlist the aid of brokers and advisors, or you might undertake the task of gaining such understanding yourself. The key, quite obviously, is to learn all that you can so that you can make the wisest investment choices.
While it is always difficult to give general guidelines, especially when various investments require specific knowledge, some basic guides to investing abroad can be offered. In considering potential foreign investments, you should seek countries that offer the following:
- 1. Have currency stability.
- 2. Enjoy political stability.
- 3. Control major assets.
- 4. Offer financial privacy.
- 5. Offer easy liquidity.
- 6. Offer annuities.
- 7. Provide competitive rates.
- 8. Provide excellent service.
- 9. Offer flexibility in investing.
Perhaps most important of all is currency stability. And this is where gold comes in.
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The Real Value of Gold
Gold is, without question, the best protection of purchasing power. Throughout history gold has remained a valuable commodity. According to the Old Testament, during the reign of King Nebuchadnezzar, an ounce of gold brought 350 loaves of bread; an ounce of gold today still buys about 350 loaves. Considering how inflation has eaten away the value of modern currencies makes the long-term value of gold quite clear.
To put things in the proper perspective, every paper currency buys much less than it did in the early 1900s. Most people are astonished these days when they are told that at one time a haircut and shave in the U.S. could be gotten for a quarter. While the purchasing power of paper currencies has eroded over the years, the purchasing power of gold has almost doubled in the last hundred years.
The real value of gold lies not in speculation but in the security it offers. The value of gold, despite periodic ups and downs, lasts. Over the long term, the purchasing power of gold endures.
Gold has been the choice of value and purchasing power since ancient times. Its value lies in its scarcity. Although gold has been mined and prized for thousands of years, only 110,000 metric tons have ever been produced. Although alchemists through the centuries have tried, no one -- not even modern scientists -- has been able to synthesize or "create" gold. The dream of turning lead into gold remains just that -- a dream. The supply of gold in nature is severely limited. Less than 2,000 metric tons are mined each year.
Gold resists the ravages of inflation. Governments around the world can easily print more paper currency, thereby eroding its purchasing power, but they can't make more gold. For this reason many financial experts view gold as being the most secure asset in an investor's portfolio.
Because of its intrinsic value, the purchasing power of gold has survived through the ages -- through wars, famines, and natural and man-made disasters. In fact, during times of crisis, the desire for gold rises because people know that it is the only thing of lasting economic value.
The Great Depression illustrates this well. In the first three years following the Wall Street Crash, from September 1929 until April 1932, the Dow Jones Industrial Index fell from 382 to 56. This was a decrease in value of an astonishing 85%. Close to 4,000 U.S. banks were ruined and were forced to shut their doors. During these dark days, the price of gold rose. Investors who had gold were better able to withstand the Depression than those who didn't, and they were more likely to recover financially once the Depression ended.
The price of gold also went up during the days that followed Black Monday, October 19, 1987. Throughout history gold has held its value when other investments, including paper currencies, have fallen in value.
Just as gold is essential to a balanced investment portfolio, it is also vital to the economy of a country. Gold represents stability in an unstable, financial world. It provides the bedrock on which a country's economy is built.
Today, Switzerland is the only country whose currency is still backed by gold. Because of this, the Swiss franc enjoys remarkable stability, and the country is a prime place in which to invest.
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Investing Abroad -- Plenty of Reasons
There are many reasons for investing abroad, aside from the basic ones of diversifying to increase potential growth. Many individuals find it hard to consider investing beyond the traditional assortment of stocks, bonds, insurance, and real estate within their own country's borders, but, given the nature of the global economy, it is now wise to seek investments abroad.
Reflect upon the typical American investor for a moment. Many Americans are reluctant to invest abroad, a mindset that is the result of their heritage. During most of this century, the U.S. dollar was the strongest currency in the world. When their own economy's weakened, investors from around the world would often try to buy U.S. dollars. Backed by Uncle Sam, the U.S. dollar was thought to be rock solid. Americans, especially, felt this way. After all, America had always protected the property of its citizens. The turmoils and upheavals that ravaged other countries, destroying property and investments, and ruining people never happened in the U.S.
Moreover, the U.S. government guaranteed the rights of its citizens. Individuals could rise as high on the economic ladder as their abilities and efforts let them. In the past, U.S. investors kept their money in the U.S. because the U.S. economy and governmental institutions provided the best opportunities and security for growth. What could be safer than keeping your money in the U.S.?
That's no longer as true today. Many investors are moving their assets out of the U.S., and the trend is growing. They see that investments in some other countries can be just as safe as investments in the U.S., they realize that, in some cases, the potential returns are greater while the risk is minor, or they may recognize that the world has become much smaller in the last few decades. Despite the political borders that remain, economic borders have blurred and in some places disappeared.
For some people, investment abroad is prudent. In some countries, political leaders are so desperate for increased revenues that they raise taxes exorbitantly, impose exchange controls, and pass regulations that are designed to confiscate wealth in whatever way they can. By investing abroad, an investor can limit his exposure to such practices.
For other people, investment opportunities that don't exist in their own country may be available abroad. Real estate is a good example. While real estate in the U.S. might be overpriced, the real estate in other countries might be very low and it might be possible to buy several properties that will result in significant future profits.
Investing abroad increases your opportunities for making profits, while at the same time limiting your risk in any one market. As the world becomes smaller and the global marketplace expands, you owe it to yourself to find international investments that will satisfy your financial needs and long-term goals.
While there are many investment opportunities abroad, one of the best places to consider is Switzerland. It has already been noted that the Swiss franc is the only remaining currency backed by gold, but that's just one reason for considering Switzerland for investment. It is a country for managing a global investment portfolio; not just a country to invest in. In the following chapters, you'll find that there are many more.
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