How to Avoid Taking It On The Chin in the Next Crisis

By investing in emerging markets, you are investing in growth that hasn’t happened yet.

Future growth, in other words.

But you also expose yourself to future risks – global pandemics… nuclear meltdowns… recessions… depressions… assassinations…etc.

By their very nature, these history-making events are hard to predict.


Lebanese-born philosopher and financial mathematician Nassim Taleb has a theory about these events. He calls them “black swans.”

According to Taleb, a “black swan event” is an unpredicted and unforeseen event that has a major impact on history.

Examples of black swan events are the assassination in Sarajevo of the Archduke Franz Ferdinand of Austria, which sparked off World War I…the September 11 attacks…the rise of the Internet and the PC…etc.

The point is, like black swans, nobody saw these events coming. (Up to the late seventeenth century, nobody in Europe thought blacks swans existed. That all changed in 1697, when Dutch explorer Willem de Vlamingh spotted one in Western Australia.)

It’s vitally important you keep these kinds of events in mind as an investor. They are the “unknown unknowns” that can quickly sink a portfolio.

That’s why this week I’ve focused on the importance of proper diversification.

Diversification is all about not “putting your eggs in one basket.” And making sure that one single event doesn’t wreak havoc on your investments…and your savings.

I’ve talked about ways you can help ensure you are properly diversified: investing across different asset classes as well as across different regions…investing in ETFs and funds…making sure you have cash and gold in your portfolio…etc.

But there’s another way you can diversify your investments… something that most investors don’t consider when they are building their global portfolio.

I’m talking about investing directly in overseas stock markets.

I’m not talking about flying around the world and opening up brokerage accounts in far-flung countries. This is an option. But it’s complicated…time consuming…and in many cases unnecessary.

Fact is you can invest in overseas markets through regular U.S. stockbrokers. And this gives you one extra level of diversification. It allows you to buy and hold stocks listed on overseas exchanges that are denominated in non-dollar currencies.

If you buy a stock listed in Singapore, for example, and the Singapore dollar rises against the dollar between the time you buy and sell the stock, your return is worth more.

Now, this swings both ways. If the Singapore dollar weakens, your investment returns, in dollar terms, weaken too.

Nevertheless, given the long-term challenges facing the dollar, having a small part of your portfolio invested directly in overseas markets can be a big advantage.

You’ll probably be surprised. But a number of large American, Canadian and British brokers allow you to buy stocks listed on overseas exchanges either online or over the phone.

The markets you can access include, Australia, Hong Kong, Indonesia, Japan, Malaysia, New Zealand, the Philippines, Singapore, Thailand, Poland, Russia, Israel, South Africa, Turkey, Argentina and most European markets.

Now, you’ve probably noticed that some important emerging markets such as China, India and Brazil aren’t on that list. That’s because these markets make it difficult for non-citizens to invest directly. But the range of markets you can invest in is still impressive.

So, how do you go about investing directly in overseas exchanges?

The first step is to call your broker and ask him what overseas markets he can invest in on your behalf. If he can’t help you, consider finding a broker who can. Switching brokers is easy these days. You may even find a one who offers lower fees and commissions.

Four brokers in the U.S. that might be worth checking out* for the overseas services they provide are Charles Schwab, Interactive Brokers, Fidelity Investments and E*Trade.

If you are Canadian or British, you might want to check out TD Waterhouse or Interactive Brokers.

Investing directly overseas is not for everyone.

Getting the right information on foreign-listed stocks can be a challenge, as can getting that information in a timely way.

Foreign languages can also be barriers. Although some markets, such as Britain, Australia and South Africa won’t pose a problem.

You’ll also need to think about the different regulatory requirements in the country you’re thinking of investing in. In short, some country’s exchanges are better regulated and more transparent then others. So do your homework.

Also, pay close attention to currencies. Some currencies are set to do very well against the dollar over the coming years. Others are less solid.

Overall, I don’t recommend you hold more than 5% of your investments directly on overseas exchanges, unless you are a sophisticated investor and you know the ropes.

But some exposure will boost your level of diversification. And help you sidestep the next black swan that lands on America’s shores.


* These are not broker recommendations. IL Investor has no relationships with any of the brokers mentioned.