Many investors, and namely those that are new to investing, want to try their hand in foreign bonds in an effort to increase their wealth quickly. Unfortunately, foreign bonds come with great risks, and those who are not familiar with those risks, may end up in the poor house. While the investment portfolio should always be diversified, the individual should have some know-how on the subject, which comes with lots of research, and constant checking on the political stability of those countries of interest.
There are three very distinct characteristics when it comes to foreign bonds, in that they are:
* Issued by the government of the foreign country * Denominated in a foreign currency * Traded on a foreign exchange market
Therefore, holding any assets, whether they are bonds or currencies, there is a risk involved, no matter how large or small that amount may be. Currencies fluctuate, and so will any cash (or bonds) you may hold on hand. This means that you may turn a great profit, or wind up with a great loss, depending on the given situation at a particular time. Investing in foreign currencies or bonds is always pure speculation because there are so many factors that can affect it. Aside from the political stability, there are unemployment rates, interest rates, economic growth, inflation, and other factors that can drive down the value of the investment, or vice versa.
Also, a foreign investor does not have the same rights or protection that a native investor has because these bonds are uneforceable claims. If the country’s government is overthrown and is taken over by another, the new government in power may deny the currency from going beyond its borders. In some cases, the interest in bonds is only payable in that currency and is prohibited from being converted to other currencies, as was the case in Great Britain, immediately after the second World War.
Are Eurobonds Actually Foreign Bonds?
No! These two differ greatly in that the Eurobonds are traded and issued in countries which actually have their own currencies. For instance, Eurobonds may be issued and traded in Japan, whose own currency is the Yen.
Investing in foreign bonds to increase wealth is not just a farfetched dream, as many investors have proved over the years that it is possible. However, it does come with some risk. Before doing so, weigh the pros and cons and remember the old adage: “never put all your eggs in one basket.”