Over the past few months I’ve visited several blogs when one topic in particular has been addressed. For the past year or two I’ve been expanding my international holdings to my current mix which is highlighted below. Time In The Market got me thinking with his comment. Although he tends to be more an ETF investor, he was experiencing similar trends as I. Then there was Bert’s CM purchase. He was agnostic to the CAD/USD correlation probably because the US and Canadian markets are usually tightly correlated with exchange rates. Then there was Tawcan, illustrating his top five. In his post he mentioned his use of ETFs for international diversification. Finally there was The Dividend Pig musing on portfolio hedging.
My endeavors in overseas investing have delivered an education of some obscure items that hopefully will benefit an investor looking out of country.
Create a Strategy
Before starting, perform your due diligence and run an issue through your screening algorithm. Then ask the question, “Is my home currency overvalued?”. In the case of US investors, the simpler question is “Do you believe Trump’s policies will result in a stronger or weaker dollar?” and secondarily, “To what degree?”. I like to use foreign exchange as a tailwind. But by investing in dividend stocks in the event I’m wrong the sting is mitigated.
Be Aware of Monthly Deviations
Currency fluctuation will result in either positive or negative moves in both portfolio value and dividend amounts. As an example January to August 2017 saw the US dollar depreciating against most currencies. One example is the Euro which has appreciated 8.95% since last October – making US exports cheaper and imports more expensive. One anomaly with the currencies I track – the relative value has been stable when compared to each other whereas the US dollar has been the outlier. Also many companies pay annual dividends or interim/final (with variable amounts) dividends. Some are capped at a percentage of profits.
Be Wary of Tweetstorms
In recent months, fluctuations have occurred as the result of Presidential tweets. Most recently was the posturing on NAFTA. This was a buying opportunity for Canadian and Mexican issues. Conversely, dividends received took a hit.
Understand the Tax Implications
The US engages in tax treaties on a country by country basis which establishes the withholding rate and the application of said rate. Ones that I’ve found with caveats include Canada (15% unless in an IRA and a part of DRS – then no withholding), Australia 15% (unless reduced via franking), Singapore – verify on a company basis whether dividends are qualified (may impact the decision to place in a taxable or tax-deferred account) and Switzerland (15% if registered, 25% if not – check your broker). The good news is that at tax time foreign withholding can be credited (with some limits) under current law.
Stay Abreast of Local Events
This can be issues not normally aired in the US such as the Australian deflation discussion (generally groceries) or the Customs workers strike in Chile. These wildcard issues have the ability to impact the profitability of the investment.
The lessons I’ve learned have been many and these are but a few. However, foreign investing can be rewarding as long as there is an awareness.