Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

Finetuning your investment strategy

Lesson 2 of 6

Should you invest in offshore securities?

Investing in markets other than the one in your country is a good way to introduce diversification into your portfolio. Offshore investments create distance between where you earn your income and the performance of your portfolio. So if your local economy is struggling, your overseas investments could remain unimpacted.

It also introduces currency diversification; you’d need to either buy foreign currency to purchase shares or use your local money to buy stocks in companies that trade in a foreign currency. Doing this could have benefits if you’re able to capitalise on currency movements to boost your profits or buy at more beneficial prices.

Say you bought shares from a locally listed retail company with no overseas branches. The price you put up for your shares will be determined by the usual market forces, as well as supply and demand within your country. But if you invested in an offshore company, the price you pay in your local currency will depend on two factors: the exchange rate and the company’s share price.

In this situation, the performance of your portfolio wouldn’t be determined only by the value of the shares, but also by the value of your currency. This can have a profound impact on your portfolio because the value of a share might decrease, but your portfolio could stay in the black due to the currency conversion. And should your base currency weaken against the share’s currency, the money you get for one share will increase.

Let’s use an example to put this into perspective. Imagine you’re based in the eurozone and you want to buy shares in a company that’s priced in US dollars. One share costs $1, so you’d need to pay the equivalent amount in euros to make your purchase. For instance, if one dollar is currently worth €0.90, you’d pay that amount per share.

Should the euro weaken against the dollar to €1 per $1 and you sold your shares, you’d get €1 for each one upon conversion when you only put in €0.90 to begin with. If your base currency later recovered and returned to its previous levels, it would mean you’ve made an additional €0.10 on your shares.

Question

Consider the same scenario from our example above. Say you bought 100 shares from the US retailer at $1 per share, so €0.90 each. You’ve reached your investment goal date and are ready to sell your holdings to reap your profits.

One share is now worth $5, and you find that the euro has appreciated against the dollar to €0.70 per $1. You proceed with selling your shares and convert to your base currency.

Ignoring currency conversion fees, what does this mean for you if the dollar later recovered to its previous levels?
  • a You lost out on a potential €100 worth of profits
  • b You gained a potential €100 worth of profits
  • c There would be no impact on your profits
  • d None of the above

Correct

Incorrect

Your holdings are now worth $500, so you’ve earned an additional $400. At the time you sell your shares, the conversion rate is €0.70 for $1 – meaning you get €350 when you convert your total funds to your local currency. Had you converted them when the dollar was worth €0.90 again, your holdings would’ve been worth €450. So you lost out on a potential €100 worth of profits (€450 - €350 = €100).
Reveal answer

When you invest offshore, it’s important that you’re aware of the additional fees incurred from converting currency. Every time you buy and sell currency, you pay a small conversion fee.

That fee forms part of the cost of your trade along with your online broker’s regular service fees. Limiting the number of forex transactions you make could help minimise the impact of those fees.

An offshore investment can protect your portfolio by providing an opportunity to earn an income in a market that isn’t impacted by the same forces as your home market. Even though most developed markets are broadly affected by similar events, it’s not uncommon for one market to be on a bull run while another enters a bearish phase.

Did you know?

A ‘bull’ market is one that’s on an upward trend due to wide-ranging optimism and confidence about its performance. On the other hand, ‘bear’ describes a market that’s on a sustained downward trajectory with high levels of pessimism from investors and traders about its future.

Overseas investments offer opportunities for diversification and a much wider selection of markets to invest in.

Shareholders who follow a buy-and-hold strategy are unlikely to be impacted by market hours in different time zones. However, if you plan to speculate on shorter-term price movements of offshore companies, you’ll have to consider the time difference between regions as well as market opening times.

Wealth building shouldn’t keep you up at night – unless you want it to.

Lesson summary

  • Overseas investments are a good way to introduce diversification into your portfolio
  • The main advantage of this is you might not lose a large sum of your holdings should anything happen that affects your local economy
  • You may incur currency conversion fees from investing in a foreign currency
Lesson complete