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International investing includes risks

Flight from international investments, particularly in emerging markets, heightened stock market volatility to begin 2014. International allocations help balance diversified investment portfolios. But investing abroad also involves other risks to consider, as Brian Kilb explains in a Money Talk Video interview with Joel Dresang. Here is a transcript of the video.

Joel: Brian, in a balanced, diversified portfolio, with a global economy, you’d probably want to have some securities from overseas, right?

Brian: Surely, Joel. You know, half the equities in the world – give or take – are overseas securities. There are great opportunities in growth throughout the rest of the world in the years ahead.

Joel: What about risks?

Brian: Well, there are additional risks overseas.

Joel: Things like currency?

Brian: Currency would be a great example of additional risk. The last few weeks we find that the dollar continues to strengthen. Foreign currencies have often been weakening. For especially some of the emerging market countries that have larger current account deficits, those debts and the relationship in the transactions between countries – a rising dollar, a weakening foreign currency, is certainly hurting those investments.

Joel: And then there are the politics of countries abroad too, right?

Brian: Geopolitical risk is a big thing. What kind of certainty do you have in an economy when the government is volatile? It adds a different, often more complex element of risk.

Joel: Are there liquidity issues?

Brian: There certainly can be. You know, we have the largest economy in the world, and therefore the most liquidity. And when you get to investing in some of the smaller countries and the smaller economies, movements in and out of certain markets can be substantially a greater portion of the overall activity of that country, and therefore you can get wild swings in market activity when big players move into small countries.

Joel: Sometimes isn’t it hard to know the credibility of the information you’re getting from abroad?

Brian: Well, recognize that along the lines of geopolitical risk, you’re dealing with a different culture. Part of research and putting together a good portfolio is understanding the financial background of any company that you might be investing in. In our country, for instance, we have generally accepted accounting principles, often called GAAP. They don’t necessarily have that same set of accounting standards throughout the world. When you go into a company to do research in a different country, how do you really know what kind of credibility does that financial information have? Sometimes you can’t really believe what’s on the printed paper.

Joel: So investing abroad is probably a good idea within the greater scheme of things, but there are cautions.

Brian: Like most things, greater return comes with the potential for greater risk.

Brian Kilb is executive vice president and chief operating officer at Landaas & Company.

Joel Dresang is vice president-communications at Landaas & Company.

Money Talk Video by Peter May
(initially posted Feb. 11, 2014)

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