Say you’ve just returned from a trip to India, and you now have that “Thomas Friedman-The World is Flat” glint in your eye. India would be a great place to invest some money, you think, especially since the US economy currently appears to be plummeting toward the center of the Earth. You just might be on to something.
The best investors know that diversifying, or owning a broad range of securities to minimize risk, is one of the most important things you can do to help your money grow. But investors are increasingly realizing that merely diversifying within the US market is not enough, since like all markets, it is susceptible to sharp downturns. Therefore, as investors, we need to be thinking globally.
Investing abroad, particularly in growing countries where much of the population is still poor, has the advantage of actually being good for the country. In the same way that the Nobel Prize-winning concept of micro-loans improves the lots of both lenders and borrowers, investments in poor countries can help finance much-needed infrastructure, new products, and innovation.
Though investing money in so-called “emerging markets“– relatively new, rapidly growing economies– might appear to be costly, risky, and complicated, it doesn’t have to be. Here’s a little primer for how to invest money in your favorite new country.
1. To keep costs down, open an account with an online broker. Sites like Scottrade and Sharebuilder allow you to trade stocks for less than $10 per transaction. Sign-up is quite simple, and you can rest assured that your money is secure. Stock purchases are incredibly easy, and even money that’s in your online brokerage account but not being traded receives a favorable interest rate of up to 2%.
2. Use your travel experiences. Few investors have the opportunity to visit a country and see what it’s like on the ground. When you have that chance, use it to your advantage. If you keep your eyes open, you might just realize that you’re vacationing in the next booming economy. Brazil, Mexico, Russia, and South Africa have all made tremendous gains over the last five years. The trick is to figure out which countries’ economies are on the cusp of greatness. To do that, the best thing you can do is visit, ask questions, and research.
3. Learn what an ETF is. Investing in emerging markets is risky business, but trading in ETF’s rather than in a single foreign corporation reduces risk considerably. ETF stands for “exchange-traded fund,” and a Brazil ETF, for example, tries to mimic the performance of Brazil’s entire market. For that reason, investors who want to invest in a foreign country need not undertake the gargantuan (and confusing) task of researching foreign companies.
There are also ETFs that approximate the performance of all the emerging markets, or regions such as the Middle East and Africa, Latin America, and Europe.
4. Buy and hold (on tight). Emerging markets are notoriously volatile. Geopolitical disasters (and successes) can cause major swings in single countries and even entire regions. That’s why, for the average poor-sap investor (like you and me), buying and holding on for a long time is the best way to go.
Anna Karenina-length disclaimer: I don’t own any of the stocks mentioned, nor do I recommended you purchase any of them without doing a LOT of research first. Please temper my advice with the knowledge that I’ve never taken a business class. Most of what I know I learned from reading an investment website called The Motley Fool at Fool.com. And yes, I recognize that taking advice from a site called Fool.com might not be the best strategy.
Remember: All investments involve risk, some a lot of it, and for that reason it should never be done by anyone.