If you’re interested in making investments overseas, but don’t have experience outside of investing in the UK, it can be tricky to know where to start.
But investing abroad is actually more common than you might realise – your pension fund, for instance, most likely contains some overseas investments, or invests in companies which make most of their sales abroad.
In this article, we explain the benefits of investing in other countries, and look at some of the best ways to get started.
What are the advantages and disadvantages of investing globally?
If you’re thinking of investing overseas, it’s important to weigh up the pros and cons carefully first. Remember that it’s really important to never invest in anything you don’t understand, so if you’re not sure which investment options are right for you, you may want to consider seeking professional financial advice.
You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guide on How to find the right financial advisor for you.
You can also learn more about investing in our article Investing – the basics.
Investing overseas might sound complicated, but it’s never been easier to do, and most brokers and fund management companies will simplify the process for you.
Foreign investment has a reputation for being risky, and this can be true with particular sectors or overseas markets where regulation is not as tight as in the UK. However, investing abroad can also introduce some stability to your portfolio if you go about it wisely. That’s because it will make your portfolio more diverse. As your money is spread across multiple economies, companies and sectors, you won’t be depending on one particular market or area for returns. If one of the countries you’ve invested in underperforms, hopefully one or more of the others may fare better, helping to offset any losses.
Bear in mind that one of the main risks of investing in overseas assets is that foreign currency movements could affect your portfolio, either negatively or positively. For example, if you put £10,000 into US shares and the market remains static over the year, then in theory you should still have £10,000 sitting there after 12 months. However, if the US dollar rises by 10% against the pound over the year, then once converted back to sterling, you’d end up with £10,100, even though markets haven’t moved. If, however, the US dollar falls by 10%, you’d have lost 10% of your £10,000, even though markets are unchanged.
It’s also worth noting that when sterling is weak, you’ll be able to buy fewer foreign-currency denominated investments, and more when it strengthens.
Investing through funds
Generally, the simplest way to begin investing abroad is to buy into a UK-based global fund that invests in stocks and shares in foreign companies. These types of funds usually invest across multiple sectors and countries in order to provide as much diversity as possible.
Investing in a fund rather than buying stocks or shares directly means that the fund manager will control and manage where your investments lie, so you don’t have to worry about not having detailed knowledge of how foreign economies work, and which companies are likely to provide the best returns. Investing through a UK-based global fund also means that you may receive certain protections from the company managing the fund that you would not get if you invested in the same companies directly. The costs of investing via a fund are also likely to be cheaper than investing directly.
Closed-end funds (also known as investment trusts) and exchange-traded funds (ETFs) are listed on the stock market, and can be bought and sold via a stockbroker. Open-ended funds, also known as unit trusts or open-end investment companies (OEICs) are purchased from the firms that manage the funds, though it is usually cheaper to buy these through a broker or a fund supermarket such as Hargreaves Lansdown, AJ Bell, or TD Waterhouse. This is because these parties tend to buy funds in bulk and receive discounts on entry and management fees, which they can then pass onto you.
To learn about some of the differences between these kinds of funds, read our article How do investment trusts work?
Investing in UK companies that operate abroad
Another option if you prefer to pick your own investments is to buy stocks in a UK-listed company that brings in revenue from abroad, also known as foreign exposure. For example, this can be a UK company that does business internationally.
Bear in mind, however, that investing in single company shares is much riskier than investing in a fund, where your money is pooled with that of other investors and invested across a broad spread of companies and sectors, as you’re effectively putting all your eggs in the one basket.
Buying foreign stocks and shares
It is also possible – and much easier than it used to be – to buy stocks and shares in companies registered outside of the UK. Many British brokers offer access to foreign markets where you can buy shares.
Remember, however, that buying stocks and shares in another country means that you are trading under that country’s regulations and protections, rather than by the British Financial Conduct Authority. Lower regulation in certain foreign markets appeals to some investors, who hope for higher rewards in return for accepting a higher level of risk and are comfortable accepting the fact they’ll have less protection if something goes wrong.
Should I invest abroad?
Whether investing abroad is a sensible step for you will depend on your financial goals, your investment timeframe and your approach to risk.
As mentioned earlier, the chances are you already have some global exposure through your pension, so it’s worth checking where your money is invested. You can find out more in our guide Where is my pension invested?
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
If you want to invest globally outside your pension and would like to make your foreign investment particularly tax-efficient, you could opt to invest through a stocks and shares-based Individual Savings Account (ISA). These allow you to put your money into ETFs, investment trusts, or stocks and shares and pay no tax on any returns the investment generates. The maximum amount you can invest in ISAs this tax year is £20,000, and this allowance will remain the same in the 2023/24 tax year . Read more in our article How do stocks and shares ISAs work?
You should, however, remain aware of the usual risks involved with investing, mainly that returns are not guaranteed and there is no surefire way to predict how a particular market will perform. If you are planning to buy stocks and shares or funds with global exposure, make sure you do plenty of research first so you’re clear exactly what you’re investing in.
Finally, remember that unless your investments are held in a tax-efficient ISA, you may have to pay income tax on any dividend income and Capital Gains Tax (CGT) on gain when you come to sell your investments. Read more about these forms of tax in our articles What is Capital Gains Tax and how do I pay it? and How are dividends taxed? It’s your responsibility to declare these returns to HMRC and pay tax on them as required.
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