Investors are often prone to “home country bias,” favoring stocks from their own country. But they can also invest in international stocks. Doing so can diversify a portfolio and provide global exposure. While the United States is the world’s largest economy and its stock market has the highest valuation, it’s worth exploring investing outside your home country as well.
From the clothes you wear and the car you drive to the food you eat and the medications you are prescribed, these purchases are likely to deliver profits to non-US companies. As a global consumer who contributes to the profits of global companies, why not push the limits by becoming a global investor as well?
What Is International Investing?
When you invest in international stocks, you are investing in companies or assets outside your home country. This can include buying mutual funds, stocks, bonds, or ETFs in foreign markets.
On the other hand, domestic investing is putting your money in entities within your own country. Many investors go for this option because going with the familiar feels safe. However, geographic concentration can increase your portfolio’s risk and limit your opportunities because over half of the global market is outside the US.
Types Of International Markets
International stocks are an effective way for investors to diversify their overall equity holdings. However, international investments have varying reward and risk profiles.
Developed Markets
Developed markets are countries with strong industrial and post-industrial economies and capital markets. Countries such as Japan, the UK, and Australia fall into this category. Generally, these developed markets have growth and risk profiles similar to those of the US.
Emerging Markets
This category refers to countries that are still growing toward becoming industrial or information-driven economies. For example, countries like South Korea and Thailand fall into this category, and investments in these markets have the potential to offer greater growth opportunities.
Frontier Markets
Also known as pre-emerging markets, these countries include Bangladesh, Argentina, Kenya, and other similar nations. Companies in these regions offer greater opportunities, but the risks are higher, especially regarding currency risk, political instability, and poor regulation.
Reasons To Invest Internationally
International markets do not always rise and fall at the same time as the domestic market. This means that owning both domestic and international securities can even out some volatility in your portfolio. Let’s explore some compelling reasons to invest internationally.
It Helps Diversify Your Portfolio
When you spread your investments across various markets, you can lessen overall portfolio risk by creating a buffer against domestic market fluctuations. Emerging Market Economies Are Growing Faster
Investing internationally provides exposure to high-growth markets. Emerging markets often offer higher returns. These markets are regions experiencing rapid economic growth and industrialization. For example, countries like Taiwan, India, South Korea, and Brazil are strong emerging markets.
More Than Half The Global Market Is Overseas
When you invest internationally, you gain access to a broader universe of investment opportunities. You can invest in stocks of household names such as Samsung, Toyota, and Nestle.
Currency Exposure Can Improve Returns
Economic cycles and foreign currencies can potentially favor investment returns, giving you a strong economic and currency advantage. Different currencies move independently of one another, particularly within their respective domestic economies. Since currency exposure carries risk due to fluctuating exchange rates, holding assets in multiple currencies helps mitigate it. Even if the US economy is underperforming, your international investments can allow you to benefit from economic growth in other regions.
How To Invest Internationally?
When it comes to investing internationally, the options are virtually limitless, and there are always ways to tailor them to your goals and comfort level. You can build a portfolio centered around your global exposure or target specific sectors or regions.
After deciding which approach aligns with your goals, you can use stocks, mutual funds, bonds, and ETFs to create your international portfolio. Many investors find that investing internationally through ETFs or mutual funds is the easiest option. In addition to diversification, investing through funds is usually easier and cheaper because you don’t have to stress over the timing and cost limitations of international exchanges.
Are There Risks of International Investing?
Absolutely. Yes, there are many compelling reasons to invest in international markets, but it is important to understand that these investments carry risks that may surprise investors accustomed to domestic markets.
- International investments offer faster growth than the US, but the growth is highly volatile.
- Depending on the region you invest in, there is also the possibility of war, revolution, or economic collapse.
- Generally, international stocks trade in smaller markets, and some of these markets may lack large buyers and sellers to make them efficient. Therefore, asset prices are more likely to move in response to buy or sell orders.
- There may be discrepancies in reporting requirements. Not every market is meticulous about transparency and reporting what it requires of companies on its public markets. Therefore, gaining a complete understanding of what is happening with an investment is crucial.
- There is currency risk, especially if a country’s currency drops relative to the US dollar. This means that you could lose a portion of the gains in stocks traded in that currency. Commissions and trading costs for international stocks are higher than for domestic stocks. This means there are higher fund fees and higher brokerage commissions if the investor buys and sells those stocks directly.
Final Thoughts
The benefits of international stocks are undeniable. However, as an investor, it is very important to understand that they also bring their fair share of risks and costs. It may be overwhelming or confusing to determine how much of your total assets to allocate to international stocks. From your risk tolerance and long-term goals to your personal expertise and experience, everything plays a role in defining how to invest in international stocks. Since you are stepping into a global playing field, it would be best to consult a financial professional for advice on how to move forward.
