In recent years, investing in foreign investments has become more popular with some investors. The following discusses some of the components involved with investing in foreign securities.
What Are Some Advantages Of Investing In Foreign Securities?
Some main advantages of investing in foreign securities are:
- Foreign securities will often have higher standard deviations than similar securities in the United States.
- Foreign securities (and foreign bonds) can be good portfolio diversifiers.
- Fluctuations in the foreign currency, with the United States currency, could change the total return on the investment for the better.
- Because income taxes are withheld on the income earned from an investment in a foreign security, the taxes withheld can be deducted on the investor’s United States income tax return.
What Are Some Disadvantages Of Investing In Foreign Securities?
Some main disadvantages of investing in foreign securities are:
- Accounting standards in foreign countries differ from the standards in the United States. Because financial ratios of foreign securities may not be comparable with similar ratios in the United Sates, analysis of foreign companies can be difficult.
- Fluctuations in the foreign currency, with the United States currency, could change the total return on the investment for the worse.
American Depositary Receipts
American Depositary Receipts (ADRs) are another option for investing in foreign securities, rather than a direct investment in a foreign country. A foreign company that wants to offer its stock to a U.S. investor will ask a U.S. bank to issue a depositary receipt for that stock. The ADR allows the investor to purchase the foreign stock from a domestic source, using U.S. dollars, on an organized security exchange in the United States. This makes it a simple process for an American investor to own foreign investments. Income from dividends and interest is paid to the investor in U.S. dollars. Foreign taxes are withheld from income received from the investment. Keep in mind that an ADR still possesses currency risk.
What Does Henssler Financial Recommend?
As of December 1, 2010, Henssler Financial recommends the following ADRs in our model portfolio of recommended stocks: Teva Pharmaceutical (TEVA) and Honda Motor Co. (HMC).
Our philosophy is that any money you need within 10 years should be invested in fixed-income securities, and any money that you will not need within 10 years should be invested in high-quality, individual common stocks or mutual funds that invest in common stocks. By holding fixed-income securities to provide for 10 years of liquidity needs, you should not need to sell stocks during a period of lower stock prices. For assets that should be in growth investments, we buy stocks or mutual funds that invest in stocks. For assets that should be in fixed investments, we buy bonds, or certificates of deposit.
When we recommend individual common stocks, we only recommend companies that are least rated “A” by Value Line for financial strength, “A-” by Standard & Poor’s for quality, or “2” by Value Line for safety. So, if a foreign security meets our strict criteria, it may one day be part of our recommend portfolio. If you would like further information regarding this topic or any other tax related issue, please contact Henssler Financial at 770-429-9166 or [email protected].