In a world where international scope is accessible to all companies and cross border trade forms a large part of many business strategies, an increasing number of investors are looking overseas for investment opportunities.

Investing in international stocks not only presents the opportunity for greater returns on money invested, but also allows an investor to diversify his stock portfolio across geographic boundaries as well as industrial and business sectors.

Investing in the equities of international companies is not without risk, however. Most obvious is the associated exchange rate risk. When an investor buys the shares of a foreign company, he will do so with exposure to the currency of the country in which he is trading. For this reason, returns are subject to the variance in the exchange rate of the dollar against the foreign currency. For example, if an American investor buys shares in a UK company, and the value of Sterling against the dollar rises, then dollar returns will increase. But if the dollar rises against Sterling, then investment return will be decreased.

There is also risk associated with the foreign markets themselves, which may have less onerous reporting and trading rules and tax investment returns differently. Of course, it could also be far more difficult to conduct research into the fundamentals of an international company, making stock valuations harder.

Methods of investing

For those investors who want to broaden their investments and diversify into international stocks, there are several ways of doing so.

Firstly, many domestic US companies have a high and increasing exposure to foreign markets. They may have have bought other companies internationally, or expanded their businesses organically across countries and continents. So called multinational companies like McDonald’s and Coca-Cola make the majority of their earnings from their overseas operations. Whilst profits made abroad will be subject to exchange rate risk, this way of gaining exposure to international markets is seen as having the lowest inherent risk for the investor.

Perhaps the most common of investing internationally is by the purchase of American Depository Receipts (ADRs). These are certificates issued by a US bank that represent the shares of a foreign company. Though denominated in dollars, the price and any dividends paid are converted from the price of the underlying foreign shares. ADRs are available in a growing number of large international companies, such as BP and Royal Dutch Shell, and are listed on US exchanges. They are traded in exactly the same manner as the stock of US listed companies.

Some foreign companies have their shares listed on US exchanges. This means that they have complied with the reporting requirements of US company regulations, and as such the related research and information risk should be similar to that associated with investing in the shares of US companies.

For those investors who want an international exposure but don’t want to conduct their own research – perhaps not having the time or inclination to do so – there are many international mutual funds available. Such funds may invest in specific markets (countries), or in entire regions, such as Far East funds. They could be industry specific or generalized equity funds managing investments around the globe.

Whilst investing internationally through mutual funds has its benefits, they will, of course, be exposed to the risks associated with investing in international stocks. The investor will also be liable to pay management fees upon their fund value.

Finally, Exchange Traded Funds (ETFs) are available to today’s investor. These funds will invest directly into the foreign securities, with fund value dictated by the price of those underlying holdings. These holdings could include directly held foreign shares, ADRs, and futures and options on foreign companies and stock indices. Just like international mutual funds, ETFs to suit the international objectives of most investors are available, whether that is exposure to certain countries or regions.

Investing internationally is now within the reach of all investors, large or small. Such investments can be made in collective schemes such as mutual funds, or in single company shares either through ADRs or direct investment abroad.

Though many routes to investment are now competitively priced, buying the shares in foreign companies on a foreign stock exchange will require the services of a full service broker. This will be more expensive than buying shares in a domestically traded US company.

However, the shares of ETFs and ADRs, for example, can be traded on the US exchanges in the same way as trading domestic shares, and through execution only brokers if wanted. The costs of buying stock in this way are far cheaper than through a full service broker.

For those investors wanting to expand their stock portfolios into international markets, often the first way of doing so is through the purchase of units in a mutual fund. This is more advantageous for the smaller investor, though management fees will be detrimental to returns. However, mutual funds do offer the immediate diversification not possible through a single stock investment.

Whatever method of investment you select, be sure to conduct proper research and due diligence before committing your investment cash. The risks associated with investing in international stocks are greater than investing at home, and include not only exchange rate risk but also all the usual risks of domestic companies (competition, regulation, rising expenses, etc.).

Finally, when investing your money, particularly in foreign stocks, it is wise to always use the services of a reputable broker. There are many fraudsters that will sell you the world for a penny. Ensuring that your broker is properly licensed and regulated by the US authorities will ensure that you are not one of the unfortunate investors caught every day with no chance of recouping ‘invested’ funds.

Ask any investment advisor, and he will tell you that the return achievable from equities is better in the long term than any other asset class. He’ll also tell you that to ensure your investments don’t suffer from a downturn in the stock market, you should consider diversifying into other asset classes. Then, to protect yourself from geographic economic shocks, you should widen your investments to encompass international stocks and bonds.

Suddenly, building an investment portfolio seems like very hard work. But it doesn’t have to be that way. Here we discuss how to build a stock portfolio that accomplishes all of the above.

Why do you want to invest?

The first thing to establish is the reason you want to invest. You should consider your aims now, and for the longer term. Predominantly, your overriding aim will be either to produce an income, or growth, or a combination of both.

The level of potential return is higher the more risk you are prepared to accept to your investment cash. Thinking about how a loss to your investment would affect you in the short term will help you figure out how much risk you can tolerate.

Once you understand your aims and your risk tolerance, then you will be able to begin to think about how to select the stocks for your portfolio.

Invest in different types of companies

Different types of companies will cater to your aims and risk profile.

For those investors looking to achieve capital growth, then growth stocks that plow profits into inward investment or acquiring other profitable companies offer longer term rewards. Speculative stocks, the shares of new and innovative companies, offer potentially very high returns, though the inherent risk is probably highest of all types of stock.

For those investors that want to profit from an economy that is growing strongly, then the shares of cyclical companies – those that do well when the economy does well – will be high on the list of stocks to buy.

If you want safer stocks that generally pay a high level of dividends, then perhaps either the shares of blue chip companies or defensive stocks will be the order of the day. Blue chips are the shares of the largest companies, whilst defensive stocks tend to outperform in a weaker economy. Growth in these may not be as high as the potential growth of speculative stocks, but they do offer some immunity from the shocks of economic or market turmoil.

Finally, there are the dividend stocks: shares of companies which have consistently paid high and growing dividends to shareholders.

Devise an Investment Strategy

Again, with a view to your long term aims and tolerance to risk you will need to consider how to select the stocks to invest in. By investing in different types of stocks, you will be able to match your risk profile and investment aims.

For example, an investor who has a very long time frame, looking for growth and can accept large short term losses may place a high percentage of his portfolio in speculative or growth stocks. At the other end of the scale, a far more cautious investor looking for income may invest mostly in the shares of blue chips and defensive, dividend stocks.

Having decided the mix of types of stock required to meet your current aims, you will need to use a consistent and logical method of selecting your stocks. This means choosing a valuation method that will compare similar stocks to each other to enable you to select those that offer the best value.

You also need to consider diversifying, not just in type of stock, but also across industries and geographies. By holding the stocks of companies in different industries, you portfolio will be exposed to winning sectors and not be susceptible to a concentrated exposure to a business sector that suddenly falls out of favor.

By holding positions in investment companies that invest their cash in government securities you will gain exposure to fixed income assets. Investing in companies that build houses or work on large infrastructure projects, exposure to property and construction assets can be simulated.

An international aspect to your portfolio can be achieved by investing in the shares of companies that make most of their earnings in international markets, or even by utilizing ETFs that are themselves invested in international stock markets.

Invest regularly

A stock portfolio is a long term investment, and investing regularly helps to drip feed cash in to your investments and takes advantage of the effect of dollar cost averaging. The stock market does not move up in a straight line: by investing at regular intervals shares will be bought when the market cycle is down as well as up, and the average cost of entry benefit accordingly.

Similarly, by reinvesting dividends not required then your portfolio will benefit from the compounding effect of buying more dividend paying shares with dividends already paid.

Monitor and rebalance at regular intervals

To ensure your portfolio is working as you want it to, then it should be monitored at regular intervals. This will allow you to rebalance positions – selling shares in those that have grown to too large a portion of fund value – and keep your portfolio in line with your risk profile.

A properly defined review process will help you to remain focused on your aims, and adjust your diversification across industries and geographies accordingly.

Remember, however, that time should be given for investments to perform, and each time rebalancing or share purchases and sales are made then trading costs will adversely affect portfolio performance. This is why major rebalancing and portfolio adjustments are usually conducted on a biannual or annual basis.

To finish up

It is entirely possible to make a stock portfolio work to meet the wide range of investments objectives and risk profiles, whilst diversifying across industry sectors and encompassing exposure to global markets as well as other asset classes.

By employing consistent valuation methods, and monitoring and reviewing your portfolio at regular intervals, you will be able to maintain its performance over the long term and it will remain in line with your changing investment profile.

Do you have bundles of cash just sitting around?

If you do, congratulations – you have a world of opportunities available to you and can seriously grow your net wealth. Cash, far more than credit, is the must-have asset in today’s economy. It is always in demand – but unless you actually do something with it, cash doesn’t accumulate on its own.

In fact, it decreases – something we’ll talk about later.

For now, we’ll discuss the ins and outs of putting your idle cash to work, including what you need to understand and look for and what options are available to you.

Why Invest?

Cash is a great asset – but it is a vulnerable asset. Think of investing it as protecting it; even if you don’t get a fantastic return, you are still better off than if you just leave it lying around.

Why is that? One word: Inflation.

Let’s say you have $100 in cold, hard cash. You decide you want to save it, so you place it under your mattress (or in a savings account; the rate of return is almost the same).

What happens to that $100? Well, five years from now, that $100 will shrink. Not physically, but it’ll shrink nonetheless because inflation eats into the buying power of every dollar in cash that you own. $100 today doesn’t have the same buying power as $100 10 years did; back in 2002, your relative purchasing power was $125.

In essence, your dollar had 25% more bang for its buck 10 years ago. Go back further to 1992 and the number climbs to $160. Want to know what it was 30 years ago? Try $233.

The point of all this is to show you that unless you put your money to work, it will, if left alone, gradually lose buying power. The only way to actually protect it is to place it somewhere where the power of compound interest works against inflation and for your money.

Options for Investment

So, if you want to put it somewhere, where can you go? Before we cover those options, let’s look at a few concepts we want to cover first.

When you determine which avenue for investment you want, the major concept you are looking for is the rate of return. All things considered equal, you want the highest rate of return possible. Different investment vehicles have different rates.

A concept that goes hand-in-hand with rate of return is risk. Generally, risk and rate of return are inversely proportionate. When one goes up, the other goes down. High-risk assets are high-reward assets, and low-risk assets are low-reward assets. That’s why your savings account probably has a paltry rate of return; it’s a safe investment that demands a lower interest rate.

Finally, you have to take into account the duration or investment timeline of your asset. Some assets, like certificates of deposit, are time-restricted in that you place your money into an account and cannot withdraw it until it reaches maturity (at least, not without paying a penalty). A one-year CD, for example, effectively locks up your money for a year. A Treasury bond – the asset offered by the U.S. Government with the longest maturity – doesn’t mature for 20-30 years. The longer the maturity, the higher the return – and the more risk you’ll take on.

Another way to look at this is to look at the liquidity of your asset. This is how easy the asset is to convert into cash. A stock is highly liquid; at any time, you can sell a stock for cash (as long as there are buyers for it). Any asset with a timeline is not as liquid, and some, like CDs, are highly illiquid. Real estate and any other real, tangible properties are included in the list of the most illiquid assets.

Here are the general investment options you have when it comes to putting your idle cash to work:

	Return Potential	Risk Potential	Liquidity	Timeline
Stocks	High	High	Very; Can sell at any time	None
Mutual Funds	High	Medium-High	Very; Can sell at any time	None
Bonds	Medium	Medium	Limited; Can’t “cash out” until maturity	Usually six months to 30 years
CDs	Low	Low	Very limited; Can’t “cash out” until maturity	One month to 15 years
Money Market Accounts	Medium	Low	Very; Almost like cash	Depends on the specific asset purchased
Real Estate Investment Trusts	High	High	More liquid than real estate, not as liquid as MMAs	Depends on whether it is public or private

 

Mutual funds are collections of stocks (or other assets) that diversify your portfolio; as a result, they are less risky than stocks on average. A mutual fund can be costly, but if you want a diversified approach to playing in stocks, mutual funds are the solution.Stocks are highly liquid investments that form the bulk of most investment portfolios out there.

They do carry the most risk (unless you talk about exotic instruments like junk bonds or credit default swaps), but they also offer substantial return and give you a lot of flexibility when it comes to investing in them. (I won’t get into stock options here, but they do offer an opportunity to gain exposure to stocks without paying quite as much.)

Bonds come in many different types, but generally fall into three categories: government bonds (primarily U.S. Treasury securities); municipal bonds (city and local governments); and corporate bonds. The safest are U.S. Treasurys, followed by municipal bonds then corporate bonds. Corporate bonds generate the highest reward, but municipal bonds typically have tax advantages that can give you a better overall benefit.

CDs, as mentioned, provide you with a return based on the interest rate after a certain period of time. You can withdraw your money before maturity, but you’ll have to pay a penalty. Returns are very low, but are usually higher than those offered by savings accounts.

Money market accounts deal in cash and cash-like assets, which can range from short-term government bills to corporate assets (called paper). MMAs do not offer incredible returns, but they are liquid and safer than many other investments.

Finally, REITs offer you the chance to invest in real estate – particularly commercial real estate – without actually buying property. They can be publicly traded on exchanges or held privately (private REITs have investment timelines that reduces their liquidity). Their value is based off rent and other proceeds from commercial properties. REITs suffered after the real estate market crash of 2007, but are regaining in value.

No matter what asset you choose, ultimately the best decision is to put your cash to work. You want to generate a high enough return to outpace inflation, which means most savings accounts simply won’t do. (Many CDs won’t, either). Keep in mind your desired rate of return, your risk profile, and how accessible you want your cash to be.

If you want to make money in the market or put your money into something that will pay in the long run, doing it haphazardly is just short of flushing your wallet as far as being smart goes. Lucky for you, we are here to make sure that you have a decent idea of how to do it intelligently. Here are 50 tips to making smart investments with your money.

1. Diversify – putting all of your money into a single sector or investment is a recipe for disaster.

2. Do your homework – due diligence on where you invest is a must. You wouldn’t buy a TV without shopping around and reading reviews. Spend a lot more time on your investments.

3. Buy companies that do global business – Think China or India. Expanding markets are where growth happens. Companies with good relationships with countries that are growing are safer bets.

4. Don’t sell every time there’s a dip – Markets will move, or no one would put their money there. If there’s a good reason to get out, do it. If the market is naturally fluctuating, ignore it.

5. Take emotion out of your equation – Buy and sell with good reasons, not out of fear or excitement.

6. Learn to take a loss – You won’t always be right, so you need to learn that your first loss is your best loss.

7. Know what your overall strategy is – Doing anything without a plan is ridiculous, but investing your hard-earned money without a plan is stupid.

8. Write down your strategy and keep it – Having a written plan will keep you on the track you start on, not changing with the shifting winds.

9. Know why you own each holding – Why do you own the investments you own? I hope it’s not because someone gave you a hot tip.

10. Make your own decisions – Again, you wouldn’t hand over money to someone and tell them to go buy a TV for you, you would buy what works for you yourself. Be much more careful with your investments.

11. If it’s on the news, it’s old news – If you see some big story about a company on the nightly news, rest assured that the professionals knew about it yesterday, and you’ve already missed that boat.

12. Always buy with limit orders – Buying with a market order is for suckers, and the market makers take advantage of suckers every chance they get.

13. If you’re buying property, buy the land too – Homes and buildings can be good investments, but they’ll never be as good as the land they sit on.

14. Never buy on margin – No one should need to be told to stay away from easy credit these days. Just for the record, though, if you don’t have it, don’t spend it.

15. Always re-evaluate your portfolio before the end of the year for tax reasons – Get rid of losers and write off the loss.

16. Follow the leaders – If Warren Buffett buys it, you should probably buy it too.

17. Invest with money you can afford to lose – never invest money set aside for something else, like your children’s college fund. Only invest it if you won’t miss it.

18. Buy IPOs after a few weeks or months – You probably won’t get in on the ground floor, and the initial rush and price rise usually settles out before too long and recedes a bit.

19. Invest for a minimum of two years – If you are investing, not trading, don’t get in and out of stocks every few months.

20. Learn to sell covered calls – This is easy money that you can make on stocks that you have large holdings in.

21. Blue chips are usually safe – The latest tech stock is sexy, but a solid blue chip company is safer for the long-term.

22. Options are for the short-term, stocks are for the long haul

23. Markets have cycles – knowing them increases your chances for gains substantially.

24. Know the best time of year to buy stocks or add to positions

25. Start with options to build a nest egg – You can start with less money and make gains quicker.

26. Don’t buy stocks unless you are investing at least $2000 per stock

27. Buying with a dollar cost averaging is smarter when the price goes up than when it goes down

28. Only invest in a small number of stocks – Concentrate on 6-10 stocks maximum.

29. Start slow – Learn what you are doing and ease in to the market.

30. Pay attention to future trends – Being aware of changes that are taking place in sectors will help you to get in early.

31. Analyze charts for trend lines and channels – Stocks follow fairly predictable paths when they have solid and consistent trends.

32. Candlestick methods are pretty accurate – At least in my experience, knowing 5 or 10 forceful candlestick patterns will help identify entry and exit points.

33. Pay attention to volume – Movements with low volume usually don’t have staying power.

34. Know your stock better than your kids – Figuratively, of course, but know the history of the stock, how it reacts to circumstances, etc. like the back of your hand.

35. Practice, practice, practice

36. A rising tide lifts all ships, a sinking ship will take others down too

37. Set up news alerts for your stock, it’s sector, and any closely related stocks

38. Buy the rumor, sell the news – By the time a story is confirmed, the play has been made.

39. Technical indicators are great, but they don’t tell the whole story – Again, know the history, financials, and as much information as you can about your stocks.

40. Do historical analysis on earnings and warnings for your stocks – Does your stock go up or down after good or bad earnings? Usually they are fairly consistent.

41. Traders will take profits, it doesn’t mean your stock is tanking – Don’t sell on every downturn.

42. In a bear market, prepare for the return of the bull – Look for signs that indicate that the bottom is near or that the upturn has started. Watch monthly charts over yearly time frames.

43. A bull market won’t last forever – Don’t get greedy.

44. If you have a goal and you hit it, sell-NOW.

45. Get a good discount broker – This can make showing a profit much easier.

46. Don’t buy mutual funds – These are for people who don’t want to do enough research.

47. Subscribe to good market news sources – Investors Business Daily, Wall Street Journal, etc.

48. Don’t take tips on stocks – Especially from friends or family. Do your own homework.

49. If you are trading, trade. If you are investing, invest. – Don’t try to turn a trade into an investment. Stick with your plan.

50. Slow and steady wins the race – Never try to make a fortune in one trade or investment. Build your future brick by brick.

There are more tips and more specific things you can do to be successful in the markets, but if you follow these you will be off to a great start.

On a side note, a big thanks to Investing Answers and Mypersonalfinance for including me in the recent carnivals.