Opening Foreign Brokerage Accounts Is a Silly Idea

Abnormal Returns rarely criticises the stories it features in its invaluable daily linkfest. But today's an exception:

Color us skeptical that individual investors should be opening brokerage accounts around the world. (WSJ.com)

Boy are they right to be skeptical. Armed with 1500 words of prime WSJ real estate and a new book to plug, Jeff Opdyke informs us that retail investors can and should buy foreign stocks abroad. "Opening brokerage accounts in places like Hong Kong, Egypt, Australia and even Vietnam is generally no more difficult than ordering a book online," he writes.

Well, yes, and sending money to Sani Abacha's nephew in Nigeria is pretty easy too, but that doesn't mean you should do it.

Investors in the US are used to being protected by the SEC. Their investments might sour, but they pretty much always own what their broker tells them that they own. In the US, it's more or less unheard-of for people to open a brokerage account, fund it, and for the broker to then simply pocket their money while occasionally sending them statements telling them how much money they're making.

Unfortunately, in the rest of the world consumer protections are very different. And even if your broker isn't an outright fraud, the chances are you still don't have anything like the sort of protections offered by the SIPC in the US. Besides, you're going to be paying large transaction costs every step of the way: when you open your account, when you convert your dollars into local currency, when you send the currency abroad, when you buy the stocks, when you receive the dividends, when you convert the dividends back into dollars, when you remit the dollars back to the US, when you sell the stocks, and so on.

On top of that, I think it's pretty fair to say that retail investors simply aren't set up to judge the risks inherent when you layer market risk, counterparty risk, and foreign-exchange risk in the way that Opdyke recommends. The correlations there are complex and dynamic, and even large investment banks have difficulty staying on top of them. Individual investors almost certainly have better things to do than try to judge the relative value of a stock in a country with high exchange-rate volatility to a similarly-priced stock in a country with low exchange-rate volatility - especially when that low volatility is almost certainly the result of an express or implied central bank monetary policy which may or may not change in future.

Opdyke claims to have made good returns by buying a stock in New Zealand in the mid-1990s. He claims that he was "searching for consumer-oriented Pacific Rim companies likely to benefit from Asia's multidecade economic expansion", but I suspect a large proportion of his returns ended up coming from the fact that he inadvertently got exposure to the New Zealand dollar at the same time. In other words, he was just as lucky as he was smart.

Now there is good advice in Opdyke's column, it just happens to be the advice he abjures:

For all the years I've covered financial markets for The Wall Street Journal, I've routinely heard the investment industry counsel that owning individual stocks, much less individual foreign stocks, is not a game small investors like you and I should play. Many pros argue that individual investors should avoid fording the oceans because they haven't got the necessary skills to analyze unfamiliar companies in unfamiliar lands, operating in unfamiliar industries, according to unfamiliar accounting rules and governmental policies.

While Wall Street experts certainly agree with the need to diversify internationally, it's best, they insist, to stick your money in a mutual fund or ETF here in America. If you promise not to hurt yourself, they might suggest you deploy some "play money" in big-name ADRs.

I'm no great fan of "the investment industry". But in this case, they're right.

Comments

[theoilyboy:]

I think you don't give people credit enough.

Speculators are stupid enough to lose large amounts of money in the US and are fully capable of losing that money abroad.

Investors can make money all across the globe and just because they aren't in the 'investment community' doesn't mean they aren't capable of discerning information that gives them an insight to exploit and profit from.

The difference these days is they can invest and profit without middle men who profit whether the investor wins or loses.

IMO, seems like the usual Wall St. arrogance.

2008 Apr 03 10:44 PM

[Roger C. Wren:]

I am retired and living in Thailand. I have a little money in a Bualuang Securities account. They are a large firm, majority owned by Bangkok Bank, Thailand's second largest bank. I feel the risk of them running off with my money is non-existant. If I do not want to pick individual stocks an ETF (TDEX) is available which tracks the 50 largest stocks on Thailand's exchange. Trading, quotes, and account status information is all available on the internet. My maximum commission for a trade is about seven dollars. Thailand runs a trade surplus, exports food, and the government is building up huge reserves of dollars. What's not to like about opening an account here?

2008 Apr 03 10:57 PM

[metal27:]

You're correct about foreign brokerage accounts, if only because of transaction costs, but I don't agree that you shouldn't own individual foreign stocks. I've found several profitable investments, all in Europe. Financial disclosures are better in some cases and even growth stocks pay nice dividends. Our 1933 and 1934 Act registration requirements along with SarBox prevent many excellent companies from listing in the U.S and we are the losers. We need to modify or dismantle what have become barriers to U.S. individual investors investing abroad.

2008 Apr 04 02:26 AM

[megiddo666:]

Foreign brokerage accounts are smart, as long as the investor isn't stupid. My US broker wasn't excited when I did this, but it was a good decision.

As a US and Cypriot citizen I have a brokerage account fully covered by Cypriot and European law, that permits trading on many European, and Asian exchanges plus the US as well. With access to US brokerage information, I can get the same investment analysis on European and other international cos. supplied by US brokerage analysts for companies I choose to invest in. Brokerage costs are less than the US.

Given currency appreciation of the euro vs. the USD, it has made a great for-ex hedge.

Me...Silly? Nope -- Smart! The only wrinkle is calculating gains for US taxes....The writer would have been more helpful in telling US investors how to open international accounts successfully....I wish I had done this years ago.

2008 Apr 04 02:27 AM

[fxtrader07:]

a commentary written from a pure us-centric perspective. there is nothing wrong with opening a brokerage account in europe, for instance the u.k. they are equally well protected, some are insured the same way u.s. brokers are. oh, and by the way - wasn't there refco blowing up and etrade is still fighting just to stay afloat?
foreign retail investors invest in the u.s. - why shouldn't u.s. investors diversify a bit abroad? i agree, safety comes first, but in a world which garvitates away from the weakening superpower usa it makes a lot of sense that americans get some foreign exposure. it certainly paid off very well over the past years! and no, adr's and etfs are not the best way to do this. they are inferior choices by far
you could as well recommend that funny "buy a S&P index fund and sit back" ... yeah, right.

2008 Apr 04 05:12 AM

[User 86945:]

Nonsense. You can lose your money just as fast in the US as abroad. As always due diligence is required. What about offshore accounts? They have been around for years. The real economy is world wide just like financial markets. And opportunity does not stop at the border. Laughably, the writer displays much faith in US authorities in protecting your wealth and not taking it from you, what a joke! "I am from the government, I am here to help you!" Wall Street hack alert!!

2008 Apr 04 05:47 AM

[User 416215:]

Pure US propaganda. I trade in multiple countries including the US and for the most part these other countries have rules and regulations which are tougher and more intensively monitored than in the USA. These seconds and smaller countries have to
tow the proverbial line unlike the horrors of what the US stock markets, thier companies and the SEC are getting away with (there are too many hundreds of examples to spend any time belaboring the point). A bit like making the small solid banks in the US
tow the proverbial line under the microscopic eye of the fed regulators while the big US banks get away with murder. My brokerage costs in other countries are very competitive with US brokerage fees but that is not to say there are not expensive full
service brokers out there just like in the US and definitely disproportionally so outside the US. Strength of currency is another matter. In regards to the USD; it is rapidly
becoming a international joke for it’s devaluations, weakness and total lack of financial integrity and unfortunately even people in the lower echelons are starting to realize this. If the US dollar had the intrinsic value removed out of it and valued like the USA
expects for most other currencies then it would drop by over 90+%, “overnight”. Again the US expects the small countries to tow the line while they get away with murder. The greatest lure for my money going into the USA is not security of the soon-to-be
bankrupt FDIC and SIPC insurers (these two feel-good agencies could not cover 1% of the institutions/deposits they pretend to insure) but simply that the USA has one of the largest financial markets in the world and has great ease of access. A financial
market that I fear will soon be replaced and taken over by the EuroNext. Your article is very irresponsible, poorly researched and very juvenile. In what world would anyone think that a bunch of cowboy acting participants are going to act more responsibly than the anal retentive Europeans?

JP (not European)

May 18 10:29 PM