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Investing offshore has its benefits, but it also has its risks… Here's what you need to know

by , 14 October 2014

Investing offshore can benefit your portfolio.

It can be a good way to diversify your investment portfolio. And it gives you the chance to get into some potentially lucrative investments you may not have access to in your home market.

But it comes with a downside. It exposes you to considerable exchange rate risk.

So what exactly is this exchange rate risk and what does it mean for your investments?

Let's take a closer look…

The performance of your offshore investments

The shares you invest in offshore may perform well in their local currency. But depending on what happens with the exchange rate, you may receive more or less than the local return.

A falling rand will boost your rand return from foreign investments, Phil Oakley in Money Week explains. A strengthening rand will have the opposite effect.

Here’s a classic example of how exchange rate risk can work against you…

Last year, the Nikkei 225 Index in Japan rose 52.4%. But during the same period, the pound strengthened by 22.5% against the yen. That cut British investors’ gains to 24.4% when they changed their money back into pounds.

What to do when the rand is falling?

If you have offshore investments and the rand is falling, you’ll most likely gain from the increasing value of your offshore investments.

It’s only when the rand strengthens that you need to think about the effect on your offshore investments.

It’s also important to think about what the exchange rate is doing when you invest and when you sell your investments. This can have a big effect on the returns you make.

So there you have it. What you need to know about the risks of investing offshore.

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Investing offshore has its benefits, but it also has its risks… Here's what you need to know
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