What Are the Pros and Cons of International Asset Allocation?
International asset allocation is the act of creating a portfolio of different investment types in separate countries or regions and, while this can have some big rewards, there also are potential problems. Many international entities offer lower taxes, either because they naturally have lower taxes or because they are seeking to attract international investors. Another benefit to international asset allocation is there typically are confidentiality laws. When building a diverse portfolio, some countries and regions will not allow investors to diversify unless they are incorporated. Building a portfolio in international countries or regions adds another layer of risk, because their money may fluctuate and decrease in value.
Taxes are a major problem for investors, especially those who deal in short-term investing, because taxes can eat up a large portion of the gains. Some countries or regions can be sought out for investing to avoid these high taxes while still making a profit. The area's taxes may be naturally lower or non-existent, especially in developing countries and regions. International investors also may get a tax break because a country or region wants more international investors, so it offers this as a bonus.
Confidentiality laws are common in countries and regions in which investors are participating in international asset allocation. Unless pressured by law enforcement, details about what the person has invested in and how much he or she has made typically are kept secret. This differs from area to area, and it may be the result of laws that apply to all investors or a bonus solely for foreign investors.
One of the biggest problems with international asset allocation is that some countries and regions will not allow an international investor to diversify his or her investments without being incorporated in the area. This involves going through a foreign legal system and paying incorporation fees, which can be costly. Owning property in the foreign country also may be a requirement of participating in international asset allocation.
Building an asset allocation portfolio has many risks, but an international asset allocation portfolio adds a new layer of risk that can ruin the investments. When investing in a domestic area, the investor rarely has to worry about the strength of money, because the profits will typically balance out. If the international entity’s money decreases in strength, then this can mean the investor loses money when he or she converts it back to domestic money.
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