International stocks and bonds can provide investors with a valuable boost to their portfolios, but they also present certain potential hazards.
Currency volatility can be one of the greatest hazards. If your investments experience value shifts due to changes in currency values, you could potentially lose money.
1. Diversification
Diversification in finance refers to holding various investments across different sectors and locations. It helps reduce your portfolio’s overall risk, thus increasing the expected returns you earn.
Stocks, bonds and cash all behave differently during different economic cycles; having multiple investments can help you maximize your return over time. But it’s not always easy to select the ideal mix of investments, which is why many investors turn to automated investment guidance or robo-advisors for assistance.
Diversification is especially crucial for older investors who wish to preserve their wealth for retirement or retirees without a guaranteed source of income for their portfolio. It also plays an integral role in portfolio planning for those hoping to send their children off to college or pay off debt.
2. Tax-Free Income
Tax-exempt income refers to any funds, property or services you receive without having to pay taxes. Examples include home sale proceeds, Social Security payments and retirement benefits.
Investing in foreign stocks and bonds may yield tax-exempt dividends. However, the income you derive from such an investment may be subject to double taxation: first by the U.S. government and then by the country where your company is headquartered.
To prevent double taxation, the IRS allows foreign tax credits on some of your dividend taxes paid overseas. So if you live overseas and pay taxes on income, dividends and capital gains in the United States, these credits can be used as offsets against these payments.
3. Access to Global Markets
Investing in foreign stocks and bonds provides you with the unique chance to take advantage of global growth prospects. By diversifying your investments, you may reduce the risks associated with investing solely within your home country.
Global markets provide businesses with access to additional capital and lower their operating expenses. Without these resources, businesses would face difficulty growing and expanding their operations.
International stocks provide investors with an unparalleled chance to invest in world-renowned leaders and innovators. Companies typically have a global reach, leading the way in areas such as technology, engineering, healthcare or commodity sectors.
4. Tax-Free Dividends
Investing in foreign stocks and bonds offers many advantages, such as tax-free dividends. These payments are often used by retirees to supplement their income, and can also serve to diversify your investment portfolio.
Dividends are rewards shareholders receive from companies for owning shares in a company. They may take the form of cash or stock.
Dividends are taxed at different rates depending on the type and amount received. Qualified dividends are exempt from income taxes, while nonqualified dividends are subject to your ordinary tax bracket.
5. Tax-Free Interest
Foreign stocks and bonds can provide portfolio diversification, but they also come with certain risks. These include country/regional risk and currency risk – both of which could negatively affect the value of your investments in U.S. dollars and diminish earnings potential.
Interest from foreign securities may not be exempt from taxation in the United States, unlike income earned on domestic stocks and bonds. Regardless, you must report it on your return as required by the IRS; depending on your tax situation, this could increase or decrease amounts owed for Social Security and Medicare premiums if applicable; additionally, if eligible for alternative minimum tax (AMT), interest income needs to be included when calculating modified adjusted gross income (MAGI). If unsure how to claim this interest on your return, seek professional help!
