When investors hesitate to invest, they limit their stock investments. Such hesitation is often caused by various misconceptions that potential investors may have about investment. If investors are to grab the available opportunities, they need to debunk these myths.
Here are the myths that people often have regarding investing and the reality that they should know about the fallacies. Many of such myths are related to overseas investment in comparison to investing in the U.S.
Myth 1: The Most Successful Companies Are In The U.S.
Many people believe that the United States hosts the biggest, most successful firms in the world. In reality, many of the best-known brands are located overseas.
This myth may have arisen from the fact that the U.S. remains the model of corporate might and prosperity for the rest of the world.
However, other countries that have adopted or imitated the brand of capitalism epitomized by the United States have many of the most successful corporations.
These companies deliver the most prominent products and services used throughout the world. For example, many Americans fill up their gas tank at a Shell station, a firm based in Netherlands. Some make calls from their LG cell phone, a South Korean product.
Myth 2: Foreign Financial Reporting and Accounting Regulations Are Weak
On the contrary, reporting and accounting regulations, especially in developed countries, are very active.
Supervision of business financials by government and demands for corporate accountability and disclosure by shareholders are not a preserve of the United States.
Many foreign governments have implemented regulations geared toward standardizing accounting and performance data.
For instance, the European Union requires all publicly traded companies to use International Financial Reporting Standards (IFRS). The IFRS is a collection of accounting and financial reporting standards the International Accounting Standards Board (IASB) developed.
The IASB have collaborated recently with the Financial Accounting Standards Board (FASB) to harmonize the two standards.
Myth 3: There Is a Strong Correlation in the Performance of the Global Markets
In reality, there is a significant divergence in returns. According to skeptics, the globalization of the world’s economies has enhanced a greater association between international and U.S. stocks.
Although the correlation has gradually intensified, the global stock markets are not always in tandem. Significant divergence in returns is still evident.
Myth 4: Investing Globally Is Not Necessary When the U.S. Economy is strong.
Many people are frightened by the unpredictability brought about by the fluctuating value of currencies in the forex market. The uncertainty that this causes prevents them from investing abroad.
In truth, foreign stocks may provide an attractive complement to an investor’s domestic portfolio. The returns of currency values for U.S. based investors can be significantly influenced by exchange rates. U.S. based investors should consider foreign currency rates because the rates determine the value of a company’s stock.
Myth 5: Foreign Markets Consistently Perform Worse than the U.S. Market
In reality, foreign stock markets have often outperformed U.S. stocks. So, when investors curtail their investment portfolio to domestic stocks, they could be limiting their return potential because returns differ.