It’s now easier than ever for Australians to access international investments. Investing overseas can provide investment opportunities not available in Australia and help diversify your portfolio; however, there are additional risks you should consider.
Here we explain some of the ways you can invest overseas, the risks and benefits involved, and how to decide if international investments are right for you.
Some of the benefits of investing outside Australia include:
- Added diversification – Spreading your investments over different countries and markets can mean that a slowdown in one country will have a smaller impact on your overall portfolio.
- Higher growth – International investing lets you take advantage of potential growth in foreign countries, especially in emerging markets. But, remember that while some countries may have higher growth and potential returns, they can have a higher level of risk.
- More options – You can invest in companies, industries and assets that are not available or are difficult to invest in domestically.
Before you invest overseas it’s important to consider how the investment fits with your investment goals, risk tolerance, investment timeframe and overall portfolio.
Then, consider which country or region you would like exposure to. Researching the country or region, its trends and political and economic environment is essential before you invest your money. See how to research international investments for more information.
Finally, think about whether a direct or indirect investment is best for your investment goals.
Direct investing is where you purchase the asset yourself and hold it in your name, for example buying international shares through your broker or buying an overseas investment property.
If you are choosing between a direct or indirect overseas investment, think about the time required to manage the investment, the cost, level of expertise needed and level of risk.
If you are considering a direct investment, it’s important to find out:
- all the costs and fees involved
- how it will be taxed
- the foreign investment laws of the country you are looking at
- how quickly you will be able sell if you need the money.
This is where your money is given to another party who buys and sells investments on your behalf. Some of the main ways Australians can gain exposure to international investments indirectly include: managed funds, exchange traded funds (ETFs) and Australian companies with international operations.
Investing internationally carries all the general risks of the underlying investments, as well as some unique risks, including:
- Currency risk – Foreign investments are usually held in the currency of the country of origin. Income and capital gains or losses must be converted into Australian dollars (AUD) which will expose you to the risk of exchange rate movements.
- Political, economic and regulatory risk – International investments are subject to country-specific risks such as political, economic and regulatory changes, which can be hard to keep track of from Australia. You will also need to understand the laws and regulations relating to foreign investments in the country you invest in.
- Selling time – If you hold investments in other countries or in managed funds that invest internationally, it may take significantly longer to sell these assets. Some countries may also restrict the amount or type of securities that foreign investors may purchase.
- Additional costs – International investing can be more expensive than investing in Australia. In some countries there may be unexpected taxes, such as withholding taxes on dividends or rental income and transaction costs such as broker’s commissions.
- Lack of information – It can be difficult to find up-to-date information on foreign companies and assets. Some foreign companies may not provide investors with the same type of information as Australian companies do or they may have different legal and accounting standards.
- Foreign legal remedies – If there are problems with your overseas investments, you may have to rely on the legal remedies that are available in the country where you invest.
If you are concerned about any of these risks you should seek professional financial advice before you invest overseas.
Before you invest it’s important to research the country and market you are investing in, the political and regulatory environment and the foreign investment laws.
Some good sources of information that can help with this research are:
- Financial adviser and broker reports – Some advisers and brokers provide research reports on particular foreign companies, individual countries or geographic regions. This can help keep you up to date with rapidly changing market conditions.
- Foreign company reports – If you are investing in a listed foreign company, they are generally required to provide financial reports, such as half-yearly and annual reports. Check the company’s website or ask your broker for a copy of the reports.
- Foreign regulators – The securities regulator in the country you are investing in may be able to tell you information about a particular foreign public company or market, foreign investment laws and warnings about scams to look out for. You can find a list of the international securities regulators on the International Organization of Securities Commissions’ website.
- International bodies – International bodies, including the International Monetary Fund, the World Bank and the Bank for International Settlements, have a large amount of data and research about different countries. These can help give you insights about how those markets are performing and global trends that could affect your international investments.
If you are an Australian resident for tax purposes, you must declare income from all overseas investments in your tax return. This includes income from offshore bank accounts, international shares, rental income from overseas properties and capital gains on overseas assets. If you have already paid foreign tax on your international investments, you may be entitled to an Australian foreign income tax offset.
See the ATO’s webpage on foreign income for more information on the tax treatment of international investments.
International investments can be an effective way to diversify your portfolio. However, overseas investments can also involve greater risks than in Australia.
If you are unsure whether investing overseas is right for you, seek professional financial advice.