There are two main reasons why you could consider investing in international stock markets:

1. Chasing the higher returns in foreign markets.

Investing in foreign stock and bond markets may come at a currency risk. Many foreign countries use a different currency than your home country. The assets that you buy and sell are priced in this foreign currency.

When you buy and sell these assets, the amount you pay and receive in your home currency depends on the exchange rate of that moment. This rate can change over time and eat your profits or exaggerate your losses (currency risk).

But there is also a currency risk that may drive you to invest abroad. That is the risk to your home currency.

Billionaire in Nothing

Do you want to be a billionaire… in a currency that is not worth anything?

Currencies are moving up and down in value compared to each other. This is the exchange rate. If you live in a country for which the currency is getting less valuable compared to other currencies, you will find out that certain items that are imported are becoming quickly more expensive.

The strength of a currency is the result of the supply and demand for that currency. More demand than supply increases the value of the currency. That is how markets work.

Demand for a currency is driven by exports and the attractiveness of investments in the domestic currency. Supply of a currency is driven by the monetary policy of the government that is issuing that currency. Making more of it available provides a downward pressure on the value.

Invest in Stock Markets Abroad

If you believe that there is a risk that your domestic currency may decline substantially in value over time (for instance as a result of enormous government debts and monetary policy), you may want to invest in stock markets abroad to hedge against this risk.

If you decided to invest a part of your savings in assets that are priced in foreign currencies to aim for higher returns and/or diversify your currency holdings, just be aware how you can avoid the currency trap.

Sign up here for our free stock market investing email newsletter to get our latest ideas and analysis in your mailbox.