Following the 2008 downturn, many wealthy Americans decided to expand their offshore exposure. How can you do the same?
Although there is no longer access to significant tax havens abroad, there are plenty of reasons to allocate a portion of your portfolio internationally. Geographic diversification, access to growing economies and currency differences are several of them.
Like it or not, we are engaged in a global economy. Like it or not, America may not be the economic powerhouse in the future. It pays to diversify some of your assets outside the country.
There are several ways to invest overseas.
You can buy domestic mutual funds and/or domestic exchange traded funds which purchase international companies.
You can buy American Depositary Receipts – explained on the SEC website by saying:
“The stocks of most foreign companies that trade in the U.S. markets are traded as American Depositary Receipts (ADRs). U.S. depositary banks issue these stocks. Each ADR represents one or more shares of foreign stock or a fraction of a share. If you own an ADR, you have the right to obtain the foreign stock it represents, but U.S. investors usually find it more convenient to own the ADR. The price of an ADR corresponds to the price of the foreign stock in its home market, adjusted to the ratio of the ADRs to foreign.”
You can invest directly in an offshore company through a brokerage firm that offers that type of investment.
Or you can go a different route such as Paul Sullivan explains in “Buy American? Upscale Investors Look Abroad”:
“What is different is how directly these [upscale] investors are going into non-American markets. They are not content with buying international equities or going into an international bond fund. They are looking to invest directly in Chinese private equity, Indian real estate, Brazilian equities denominated in reals and Australian government bonds. They are also opening cash accounts in multiple currencies”.
In the same article David Frame, global head of alternative investment at J. P. Morgan Private Bank is quoted as saying:
“There is a lot going on when a country is growing and developing that is hard to address through the public markets,”
and noted that investors were pooling money with each other to invest in Asian infrastructure and Asian private equity.
There May Be Tax implications On Your Foreign Investment.
The Wells Fargo Wealth Management Insights Center document The Do’s and Don’ts of International Planning lists some of the potential tax issues to consider.
- Your taxes may become more complex.
- There is a specific test your accountant should execute to see if you are considered US tax resident.
- The USA has tax treaties with many companies – these may have to be examined to determine your tax implications.
- US domestic exchange traded funds and mutual funds are straight forward tax wise.
- US domestic hedge funds and private equity funds are usually structured as limited partnerships or llcs and so are also fairly straight forward from a tax perspective.
- Offshore funds and private opportunities have tax implications – in controlled foreign corporations or passive foreign investment companies people that are US tax resident have to pay taxes each year to the US government on income generated but not yet within the USA. If they don’t they pay penalties.
“Invest Abroad Without Getting Burned” by U.S. News and World Report Published February 16, 2011 http://money.msn.com/mutual-fund/invest-abroad-without-getting-burned-usnews.aspx?page=2
“Buy American? Upscale Investors Look Abroad” by Paul Sullivan Published: November 19, 2010 http://www.nytimes.com/2010/11/20/your-money/20wealth.html?ref=wealthmatters
“How to Invest in International Stocks” by Mark Published on June 6, 2011 http://buylikebuffett.com/stock-investing-2/how-to-invest-in-international-stocks/
U.S. Securities and Exchange Commission http://www.sec.gov/answers/adrs.htm