One of the investment strategies many portfolio analysts have harped on investors to consider is the concept of investing earnings outside one’s borders, for diversification purposes. The thought is that investing the money one makes within his or her domestic stock market is inherently riskier than investing the money abroad, since any macroeconomic effects that would impact an investor’s income source (employment) would likely also affect the stock market of the investor’s home country.
The reality is that most investors tend to put money earned domestically into their own stock markets for a number of reasons. For one, investors tend to know the companies that operate in their country better than those that operate abroad. Investors also may be wary of foreign exchange effects related to investing abroad, as changes in exchange rates could easily wipe out any gains that would have otherwise been realized, should exchange rates fluctuate in the wrong direction.
In any sort of foreign investment strategy, hedging thus plays an important role in taking out some of the risk associated with currency movements over time. A number of hedged exchange-traded funds (ETFs) are available for investors looking to minimize or eliminate this risk, and investors can also buy swaps or other securities individually to recreate such a hedge, although engaging in such trades can often be too complicated or time consuming for many investors to consider, making hedged ETFs a solid option for investors looking to place some of their money outside their own borders.
