Though this blog has focused primarily thus far on the benefits of obtaining a second citizenship or residency, that is just one strategy that can make up part of a much larger plan of international diversification. There is not a lot of good quality information about the benefits of international diversification, and so this blog post will provide a brief summary of what it is, and the benefits it may provide you.
At its simplest, international diversification refers to a process of ordering one’s personal, business and professional affairs such that neither you nor your assets are any longer confined to one geographic location. This action has been referred to sometimes as “going offshore.” Offshore, in some circles, is used in a pejorative sense, but it simply means doing things in countries other than one’s home country. In that sense, Asian immigrants who invest in the United States in order to obtain E-5 Visas are “going offshore” from the countries of their respective births.
Some authors and politicians refer to “offshore investments” and “offshore banking” as if their immorality and illegality are just self-evident, when in fact it simply isn’t true. There is nothing illegal or immoral about investing or moving assets outside of the United States. International diversification, if done correctly and for the right reasons, can provide a wealth of benefits.
If you are a U.S. person, international diversification is not to be used as a tax dodge. To be sure, in previous days, some individuals would have overseas investments for which they did not report income, but those days are mostly gone with the implementation of worldwide financial reporting standards. Just as a side note: the implication that offshore diversification is used primarily for illegal tax dodging is primarily an American invention, because in most other countries, holding assets in foreign jurisdictions would not trigger income tax or reporting targets in the owner’s home jurisdiction. In fact, the United States even gives tax breaks to foreign investors investing in the U.S. that it does not give its own citizens. But all of that is the subject of another blog post. For the U.S. reader of this blog, international diversification still provides a number of benefits.
1. Investment Risk Diversification. Stock advisors often tout diversification to solidify an investment portfolio, but investing internationally can create true diversification. Not only can you diversify into different asset classes, but you can also diversify into different currencies. For example, you may have stocks you own in the U.S., which are of course denominated in U.S. dollars. But you could also invest in, for example, farmland in South America—a completely different asset, and valued in another country’s currency. And as a third example, perhaps you might invest in commodities in Asia, denominated in the Chinese Yuan. Three different types of assets, three different markets, three different currencies. In the event of another U.S. recession, your portfolio might better weather the storm than if you hold everything within the boundaries of the U.S.

2. Asset Protection. In the United States, both you and your assets are at a greater risk of litigation than probably any other country in the world. It is an unfortunate defect in our judicial systems that frivolous litigation, and the threat thereof, is a real danger to U.S. citizens and their assets. But that danger can be mitigated by diversifying one’s assets internationally. When a plaintiff’s lawyer is considering taking on a case for a would-be litigant, one of the things he often does is to run an asset search on the potential defendant. The defendant who very visibly holds assets (real estate, bank accounts, businesses) in the U.S. is a much bigger potential target than the one whose assets are in harder to find and harder to reach locales. In a worst case, this means that an unfavorable judgment against you will not strip you of all of your assets. In a best case, this can mean that the lawsuit is never filed because you and your assets don’t constitute “low hanging fruit” for the plaintiff or his lawyer, and they move on to easier targets. Note: this is not to imply that you can thwart a potential litigant’s claims by simply moving all of your assets to another jurisdiction. In most states that would constitute an attempt to defraud creditors, and could subject you to stiff civil sanctions and possibly even criminal penalties.

3. Political Risk Diversification. Although a foreign concept to most Americans, many investors in other countries understand the need to diversify internationally to hedge against political risk. Citizens of Argentina, for example, have grown accustomed to the economic crashes that have been plaguing their country approximately every ten years, and often keep some of their assets and money located outside of the country. Argentina has in the past introduced capital controls (restrictions on taking money out of the country and even out of the banks) that has caused hardship; so the more prepared of them have stored assets elsewhere in the event of another crash. Citizens of other countries with histories of instability have learned that they may want to create a nest egg somewhere else, in case unrest or even war makes it necessary for them to leave. Americans, however, are unused to political unrest or internal wars. But that doesn’t mean unrest couldn’t happen here. International diversification is a more proactive and positive form of preparedness than “prepping.” Building a concrete bunker stocked with bottles of water and canned foods is really a no-win situation: if you’re right and the worst case scenario comes, then congratulations, you get to live in a concrete bunker and eat canned foods—what sort of life is that? If you’re wrong and that scenario never comes, then you’ve spent a bunch of time and money needlessly. But simply moving assets to another jurisdiction to hedge against political risk is more positive. If bad things don’t happen in your home country, so what? You’ve got some investments overseas. If bad things do occur, then you have created yourself a potential life raft by storing some of your assets in another country to which you can go and weather the storm.
International diversification can provide you with a number of benefits. It can allow you access to investments better than you can find in your own country. And at the same time, diversification can act as a protection of your assets, while also hedging against investment risk and political risk.