Exploring The Benefits of ADR's
By Anthony Rhodes
Having a diverse portfolio is a sure-fire way to ride out the fluctuations of the stock market. When our investments are spread amongst various instruments, we are best positioned for success, and this truth provides us with comfort, regardless of the Dow’s gyrations. This idea of diversification is inherent amongst some investment products, such as ETF’s and mutual funds, but the individual nature of stocks doesn’t afford them a similar luxury. If one wanted to take on the task of diversifying a stock portfolio, he’d run into a wall of difficulty, because his ultimate subjugation to the events and circumstances within a single country, will never allow him to truly accomplish his goal.
A solution to this problem would entail a way to purchase stocks from outside the United States. Such a means would give a stock portfolio the same benefits enjoyed by other diversified investment tools. Well, this week we’re going to discuss a product that allows us to do just that. And along the way, we’ll also learn that diversification within itself, isn’t the only benefit enjoyed by these American Depository Receipts.
Did you know that many of the largest companies in the world reside outside of America? In fact, some products that you use on a regular basis; although branded to be as American as apple pie, are actually owned by foreign corporations. ADR’s or American Depository Receipts, allow investors to own such companies, regardless of their countries of origin. Whether it’s an automotive giant from Germany or a confectioner from Switzerland, these products enable investors to buy these corporations individually, versus sharing their potential profits, like they’d do if they owned a mutual fund with the same names inside. This provides a tremendous advantage to investors who like to solely purchase stocks, but who also seek to add diversity their holdings. By mixing your choices between ADR’s from various countries, you gain from both their distinctiveness as standalone properties, and their fortification as a collection of diverse multi-national representatives.
Of Bulls, Bears, Hawks and Doves
For obvious reasons, stock investors rely on ADR’s to smooth out the markets’ bumps, but they also enjoy another benefit in which they offer. As a hedge against political risk, ADR’s also protect such investors, by ensuring that their monies are invested in companies from many different regions. This proves beneficial when certain parts of an area are overseen by conservative factions and others, more liberal ones. In the event that political unrest transpires, these investors have limited exposure; as their positions are not aligned to any single geographic location. Now, as Americans, such activities might not sound all that plausible, but in other parts of the world, political upheaval is not just a possibility, but a regular and consistent occurrence. But this happenstance alone doesn’t prohibit such locations from producing fantastic businesses, and ADR’s allow investors to participate in their growth potential.
Investing in stocks affords us the possibility to the profit wholeheartedly in the success of single corporations. This proves beneficial to individuals who like to own shares of companies, and not just shares of mutual funds. And although one can receive a certain degree of assortment through the ownership of various indigenous stock sectors, ADR’s can help us by adding a global diversification component to our portfolios.
(Anthony Rhodes is a Registered Investment Advisor and owner of wealth management firm The Planning Perspective www.theplanningperspective.com )