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Off Shore Investing

Price Headley
Price Headley
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In the past 25 years, the US stock market has shrunken from 66% of the world market capitalization to a mere 45% currently. By the time 2020 comes around, the US stock market will only make up 33% of the world stock market. So there are significant opportunities abroad.

Recently, a reader sent us an email asking us if she should open an account offshore because she had reason to believe that the US dollar would depreciate and that the US stock market might drop late in the year. The first thing here to realize is that the main reason investors open offshore accounts is for the benefits of confidentiality, tax reduction, and legal protection of assets. So, offshore investing is not necessarily the solution to the reader's concern. However, solution may be the use of international investments and foreign currency.


Off Shore Investing

Offshore investing refers to the many strategies available outside of an investor's home country to gain tax benefits, confidentiality, and asset protection. As far as tax benefits go, a U.S. investor can open an account offshore in a country where tax rates are very low, or in some cases zero. Another benefit of offshore investing is confidentiality. Many wealthy investors own corporations that must be registered in the U.S and thus offer less confidentiality. However, in many countries outside of the U.S. registration is not necessary and thus, wealthy investors can remain anonymous. The third main benefit of offshore investing is asset protection. Many countries outside of the U.S. have laws that allow for estate and asset transferring with low or no taxes. Many investors also transfer assets offshore because legal entities formed offshore often offer another layer of protection from litigation and seizure such as in a bankruptcy case. These are the main reason for off shore investing.


International Investing- Benefits and Risks

Next, we will move to the real issue that our reader had. She had a concern about the U.S. stock market going down and as well as the U.S. dollar. We will first discuss the issue of the U.S. stock market. One obvious solution is to invest internationally in order to diversify investments and reduce risk. Buy why should investors buy into international companies? First of all, they do offer diversification and often have returns that are non- correlated to the S&P 500. For example, last year was a relatively flat one for the U.S. market. On the contrary, the Nikkei 225 was up over 40% last year. Also many or the largest companies like Sony, Mitsubishi, and Nokia are headquartered outside of the U.S. One key concept to remember is this. In the past 25 years, international markets have grown in their correlation with the U.S. market. This is due to increased international trade and economic dependency amongst the nations of the world. One way to combat this trend is to invest in countries that have economies that are significantly different and located in different time zones from the U.S. such as Middle Eastern countries and Pacifi- Ex-Japan countries. Investors can own international stocks like Sony through American Depository Receipts such as SNY and also via mutual funds.


Currency Concerns

Next, let's talk about the problem of a U.S. dollar dropping. How can an investor address this concern? First of all, he, or she can invest in the same securities mentioned above. ADR's are subject to currency risk and the performance of the currency in the underlying asset's country effects the value of the ADR directly. This means that a drop in the U.S. dollar may actually benefit many ADR's. The next way to hedge against a drop in the U.S. dollar is to invest in foreign currencies. Just like ADR's foreign currencies can be purchased without the use of an offshore account. There are numerous FOREX firms that are accessible online. Of all the securities available to investors, FOREX has amongst the highest leverage factors. That means that a small investment could yield a very large return and vise versa. Forex can be very risky, but is an avenue through which an investor can hedge against U.S. currency risk. Next, let's look at Japan in detail.

With the strength that our fourth largest trading partner has shown in the last six months we thought that this would be a good time to discuss Japan. You may have heard recently that the Nikkei Index has reached its highest level since 2000. As you can see in the chart below, the AMEX Japanese Index (JPN) has gained over 40% since June 2005, and all this during a time in which our own S&P 500 gained less than 10%.

Below we have provided you with a weekly chart of the Japanese index. The current price is 173.94. You can clearly see the sudden movement that started during summer of last year after such a long time of being basically flat. The Stochastics rating is firmly in the "Overbought" level, but remember that Overbought doesn't always mean a decline is coming. In this case we feel it is an indication of a big trend that will continue. We feel that it will pass 200 but would put a stop price in at 155, where the 20 week line rests now. Be sure to adjust that stop as the 20 week line moves higher.


AMEX Japanese Index (JPN) - Weekly

This growth has probably been fueled by all the talk recently of the Japanese economy finally recovering from its years of problems. A variety of economic indicators have shown improvement lately. The current account surplus has risen over 15% from a year ago and machinery orders have also risen several months in a row, just to name a couple.

So how can you take advantage of this surge in the Japanese stocks? One way is to invest in ADRs from Japan or in mutual funds that hold them. You are probably familiar with a lot of these, such as Canon (CAJ), Honda (HMC), Nissan (NSANY), Sony (SNE) and Toyota (TM). There is also an exchange traded fund issued by iShares that tracks Japanese stocks. The symbol for it is EWJ and right now it has the fourth highest average volume of all the exchange traded funds.

So to some it up, an investor concerned with excessive risk in the U.S. stock market can invest in ADR's, international mutual funds, and foreign currency amongst other investment vehicles. There is always a way. Be disciplined - and trade well!

Price Headley will be available to take your questions until Monday, January 30. Please use the form below to submit your questions.

 
 
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