Castle Camping & A Wild Wedding

A Guide on Foreign Exposure and How to Invest in International Stocks

This past week, I traveled to the South of France for a friend’s wedding. While the weekend ended up magically, it began with a bit of a rough start. 

The wedding took place in a small town called Castelbiague and I sorely underestimated how difficult it would be to book a hotel. Not only were the options limited, the wedding took place DURING the Tour de France. So after hours of hotel searching, Airbnb scrolling and desperate calling, I landed on the only available option - to rent a tent and stay on the castle grounds (yes, the wedding was held at an 18th century castle). Dry shampoo, deodorant and anti wrinkle spray would certainly be sufficient enough to get me through the weekend…. Luckily, 2 weeks before the wedding, a guest cancelled their trip and a local B&B popped up. 

While I was saved from looking like Reese Witherspoon’s character in Wild at the wedding, I was faced with another hurdle - giving the maid of honor speech. Now, I don’t normally get stage fright, but this was my first time being in a wedding and I was presenting to a group of 180 people - 90% of which were French. I felt completely exposed, out of place and embarrassed for not knowing the language. 

As I was about to go on stage with my phone shaking in my hands, my friend looked at me and said, “Just look at me and finish this glass of wine!” 2.5 minutes later, the entire room laughed and cried with me and we proceeded to dance until 6am. The only final barrier was the horrible wine hangover I had the following day but I wouldn’t have had it any other way. 

And that leads me to today’s topic, foreign exposure. Because sometimes you need to be exposed to something new, even if it gets you out of your comfort zone.

What is Foreign Exposure?

Foreign exposure is the act of selecting global investments as part of a geographically diversified portfolio. In other words, it is investing in instruments outside the country you live in. For the purpose of this article, I am going to focus on foreign exposure as any investment outside the US.

What do Foreign Exposure and the Wedding have in Common?

1. They are necessary - If I didn’t go to the wedding, I am fairly certain I would be down a friend. We have been friends since we were kids and the wedding had been postponed twice already, so it was absolutely necessary that I get there at all costs (even if it meant staying in a tent). Investing in international investments is also extremely important. In fact, most financial advisors recommend at least a 5-10% allocation for conservative investors and up to 25% foreign exposure for aggressive investors. 

2. They get you out of your comfort zone - While I had the best time at my friend's wedding, I was definitely out of my comfort zone. The entire wedding, including when a priest asked me to sign the marriage documents, was in French. I was also the only speaker to say anything in English which led to a numerous heckles from the audience. And although I felt out of place, I would never have missed it. Investing in international companies and investment vehicles can also be uncomfortable because you might not be as familiar with the space. And although it can put you out of your comfort zone, it doesn’t mean you shouldn’t do it.

3. Volatility - To say my emotions leading up to the wedding were volatile was an understatement. Three weeks before the event, I panicked about the tent situation and wasn’t even sure we would be able to travel outside the country due to Covid restrictions. I also got a crazy rash on my cheek from all the stress (while I don’t take my boyfriend’s investment advice, I absolutely depended on his emotional support during this time, lol). International investing can also be volatile and is considered riskier than domestic investing. This is due to a number of factors such as political risk, more drastic changes in market value and greater risk of market manipulation and fraud. While this is a generalization, it's important to note that foreign markets are at higher risk of these things because US markets are generally more regulated. 

4. They can seem overwhelming - Being in a wedding abroad after an entire year of quarantine was pretty overwhelming. Getting foreign exposure can feel similarly overwhelming given there are 195 countries on the planet. I am here to show you a few ways to get started and I’ll note, you can’t actually invest in all of them. 

How do I get foreign exposure?

There are a few ways to get international exposure. For the purpose article, I am going to talk about ETFs, Mutual Funds, and ADRs.

ETFs: One of the best ways to get access to international exposure is through ETFs (exchange traded funds). These are managed pools of companies that can help you get exposure in a quick, diversified way. One of my favorite ETFs is IEFA which is composed of large-, mid- and small-capitalization developed market equities, excluding the U.S. and Canada. If you are seeking emerging market exposure, consider taking a look at IEMG which is composed of large-, mid- and small-capitalization emerging market equities.

Mutual Funds: Another way to access international exposure is through mutual funds. These operate similarly to ETFs but can be slightly less tax efficient and less liquid (remember, ETFs trade throughout the day while mutual funds only trade once a day, so prices fluctuate less). You can check out this list of international mutual funds here. 

ADRs: And finally, you can get international exposure through ADRs (American depositary receipts). This is a vehicle that represents securities of a foreign company but trades on the US stock exchange. These are particularly great because they eliminate foreign investment fees (which I touch on below), especially if you are interested in single name international companies. 

Please note: Review my note below about portfolio allocation and review your time horizon and risk tolerance before investing in any foreign vehicle. 

Things to Be Mindful Of

1. Transaction Costs - When investing in foreign vehicles, it's important to recognize that it is often more expensive than investing in US stocks (if you are outside the US, investing in US stocks may be more expensive for you). The majority of transaction costs are driven by brokerage fees such as stamp duties, levies, taxes, clearing fees, and exchange fees. If you want to avoid these fees, you can consider investing in ADRs and indexes/ETFs that trade on the US stock market.

2. Allocation - Before investing in any foreign instrument, make sure you have an asset allocation and plan. Check out my article here to help you think through risk and portfolio construction. I have also broken down some suggestions for foreign exposure below:

   If you are a more aggressive investor: 

   ~20% Non-US Equity exposure & ~3% Emerging Markets Equity exposure

   If you are a more moderate investor: 

   ~17% Non-US Equity exposure & ~2-3% Emerging Markets Equity exposure

   If you are a more conservative investor: 

   ~15% Non-US Equity exposure & ~2% Emerging Markets Equity exposure

3. Currency Risk - Now this topic deserves an article on its own (I will do an article on FX hedging and currency risk in the next few weeks) but I will give you a high level breakdown. Currency risk is the possibility of losing money due to unfavorable changes in exchange rates. 

   For Example: Let’s say you want to invest in Canada Goose (GOOS.TO). Since the company trades on the Canadian stock exchange, you need to purchase the shares in Canadian dollars (CAD). You convert your US dollars to CAD and make the purchase. The company then significantly increases in value (let’s say 20%) and you decide you want to sell your shares. You sell the shares and cash out in CAD. However, as you go to exchange your CAD for USD, you see that the Canadian dollar has depreciated 15% against the US dollar. Therefore, you only make a 5% return (minus the trading costs). 

   Please note: This is an extreme example, and normally the US and CAD dollars move in tandem, but the point is that currency risk is something to be mindful of - especially in more emerging markets. 

4. Liquidity Risk - When investing in foreign markets, especially emerging foreign markets, you will be susceptible to liquidity risk - This is the risk of not being able to sell an investment without risking substantial losses due to a political or economic crisis. While this is less of a concern with mutual funds and indexes, this can be a concern when investing in single name stocks and bonds. In order to prepare for this, stay up to date on geopolitical events and steer away from more volatile markets which are often more suitable for sophisticated investors.

   What’s next?

   Thank you for reading!! If there is a topic you want to discuss, please DM me on Instagram at @notyourbfsinvestmentadvice or email me at kelsey@aurafinance.io I also am building a company called Aura (formerly known as Tardi) - a financial wellness and investment platform. If you’re interested in joining the beta, sign up here.

   See you next week lover!

   Disclaimer: All investment strategies and investments involve risk of loss. Nothing contained in this website should be construed as investment advice. Any reference to an investment's past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit.