About half of our Stock Trend Investing members invest just in the U.S. markets. The other half invest internationally. You need to know a few things extra when you want to invest your savings in international markets compared to when you invest domestically only. At Stock Trend Investing, we want to help in you in getting the required understanding and insight.
When the Japanese Nikkei gained 7.2% during January and the NASDAQ gained 4.1%, you are mistaken when you think that the Nikkei would have made you more money. Yes, you are reading this right. In this case 7.2% is not more but less than 4.1%. I will explain.
To be able to see how 7.2% can be less than 4.1%, you have to take into account the currency that the stock market index is nominated in. The value of the NASDAQ is measured in U.S. Dollars. The value of the Japanese Nikkei index is measured in Japanese Yen.
Thus during January, the NASDAQ gained 4.1% measured in U.S. Dollars. And the Nikkei gained 7.2% measured in Japanese Yen.
In one of our previous blog posts we have seen what the trap is you can fall in when you invest in foreign stock markets. In this post you will learn a strategy for how to avoid that trap.
The unique catch that foreign stock markets pose to an investor is the currency risk. When we talk now here about foreign stock markets, we assume that these markets use a different currency than the currency in your home country.
Now here is the principle rule:
When you invest your savings in foreign stock markets, you can still lose money despite markets going up. The risk here is the currency trap. Read on to understand this trap and how to avoid it.
Imagine the following situation. You have invested some of your savings in a foreign stock market. The reason is that you expected that market to go up much more than the stock markets at home. And you invested in the safest possible way:
Get the benefits from a global geographical diversified portfolio of index funds
Once your stock investing portfolio is large enough, you can easily use index funds to diversify your investments over different regions in the world. Such a diversification has a few advantages that we will list below.
Here are four reasons for diversifying your stock investments geographically around the world:
Currently the Euro is 16% weaker versus the US Dollar compared to its top in July 2008. At that top, the Euro was 81% more valuable than at its bottom in February 2002.
This currency rollercoaster can have a major impact on your investing returns when you invest your savings overseas. Foreign currency fluctuations can amplify your returns or annihilate them.