The most serious risk you run when investing abroad is from currency movements. You may be lucky enough to invest in a foreign share that runs up 50%. But if the local currency halves in value against the pound, you will be no better off by selling at that point.
Example
In countries that are prone to devaluing their currency, foreign investors can incur catastrophic losses overnight. It was a wave of such devaluations that triggered the Asian crisis in 1998. At the height of the panic, some shares even in the developed market of Hong Kong could not be sold at any price. The mere fear that the authorities would devalue was temporarily enough to paralyse the market - even though that fear proved groundless.
Anticipating currency movements is no easy task. Professional investors devote staggering amounts of time and money to betting on currencies. Sometimes they are spectacularly right. George Soros famously made a billion by speculating that the pound would drop out of the ERM. But they are just as often badly wrong. It was not so widely publicised that Soros lost a billion on his Russian investments when the rouble tumbled.
You do not have to outsmart Soros to reduce your exposure to foreign currencies. Instead, you simply have to practice sensible diversification. If you spread your holdings amongst several countries, it is most unlikely that all their exchange rates will move against you simultaneously. Some will probably move to your advantage.
Further measures you can take to reduce currency risk are:
George Soros
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