We conclude our investment risk series this week by looking at foreign investment risk.
Foreign investment risk is the risk of loss when you invest in foreign countries. This can include investing in equities in foreign companies or simply making any investment with an entity that is not based in Canada. There can be currency risks, political risk or interest rate risks that might not affect similar investments within Canada.
We talked about currency risks earlier in the risk series. By investing in another country it makes your investment tied to the value of their currency when set against Canadian dollars.
Political risks are associated with foreign governments. The nationalization of a company within another country for example could affect foreign investments. Political scandals and changes of government can also affect foreign investments. Capital controls where foreign governments limit monetary outflows can affect foreign investments.
Interest rates differ across countries. Just because interest rates are stable or changing in Canada does not mean they will act the same globally. For example, if Canada raises interest rates it does not mean the U.S. will also raise its interest rates. The differences in interest rates can affect currency exchange rates giving rise to additional currency risks.
Throughout the investment series we’ve outlined risk tolerance and various forms of risk that can affect investors. The most important thing to remember is that all investments have risk. Knowing your risk tolerance and the risks you are exposed to will help you make informed investment decisions.