Investing in the stock market often brings to mind familiar American companies like Apple, Tesla, or Amazon. But savvy investors know that the world of stocks extends far beyond US borders. International stocks, which represent companies based in countries outside the United States, offer a powerful way to both diversify your portfolio and potentially tap into faster-growing economies.
While the idea of investing overseas might seem daunting, the benefits can be significant. In this guide, we’ll break down the basics of international stock investing, the key reasons to consider adding them to your portfolio, and how to get started.
Let’s bust a common misconception right away: international stock investing isn’t inherently riskier than investing in the US market. Any stock carries some risk, but the key is how you manage that risk – and diversification is your best tool.
Diversification: The Core Benefit of International Stocks
When it comes to building a solid investment portfolio, diversification is a non-negotiable. It’s the simple but powerful concept of spreading your money across different assets. Why? Because it helps you weather the ups and downs of any individual market. Think of it as the investment world’s version of “don’t put all your eggs in one basket.”
International stocks play a crucial role in diversification because they often don’t move in tandem with the US stock market. Economic cycles, government policies, and other factors affecting different countries can all be out of sync with what’s happening domestically.
For example, let’s say a major economic downturn hits the United States. While your US-based stocks might decline, your international holdings could continue to perform well or even offset some of those losses. International investing gives you exposure to a wider range of economic scenarios, reducing the overall risk of your portfolio.
Access Growth Opportunities Beyond the United States
While the US stock market offers impressive growth potential, it’s not the only game in town. Investing in international stocks opens the door to emerging markets and other countries with rapidly developing economies. These markets often offer the potential for higher returns compared to more mature markets like the United States.
Let’s look at some promising regions:
- Asia: Countries like China and India boast fast-growing middle classes with increasing spending power, driving demand for a wide range of goods and services.
- Latin America: Despite challenges, countries like Brazil and Mexico are home to innovative companies tapping into natural resources and expanding infrastructure.
- Frontier Markets: These represent smaller, less developed economies that carry higher risk but also offer very high growth potential for adventurous investors. Research is key here!
Investing internationally lets you participate in economic trends and innovations happening all over the globe, potentially boosting your portfolio’s growth over the long-term.
Currency Fluctuations: A Potential Advantage
Currency exchange rates—how the value of different currencies compare—can seem like a complex topic. But when you invest in international stocks, it’s important to understand how currency fluctuations can affect your returns, both positively and negatively.
Let’s break it down:
- Weakening US Dollar: If the US dollar weakens against other currencies, the value of your international investments will increase when converted back into dollars. This provides a boost to your returns, even if the underlying stock price hasn’t changed.
- Strengthening US Dollar: The opposite is also true. If the dollar strengthens, the value of your international holdings will decrease upon conversion.
Of course, currency fluctuations are a two-way street, adding both an element of risk and potential reward to international investing.
Important Tip: It’s wise to look at a company’s financial statements in their local currency to get a true sense of their performance, regardless of exchange rate fluctuations at any given moment.
How to Invest in International Stocks
Good news: investing in international stocks has become much more accessible in recent years. Here are the most common options:
- International Mutual Funds: Mutual funds pool money from many investors into a basket of stocks that match a specific theme or region, like an emerging markets fund or a European index fund. Funds are a great starting point, offering instant diversification and professional management.
- International Exchange-Traded Funds (ETFs): ETFs are similar to mutual funds but trade on an exchange like a stock. They often have lower fees and offer a wide range of countries or industries to target.
- Individual Stocks: With more research and a brokerage account that allows for international trading, you can buy shares in specific foreign companies. This offers the most control, but also requires significantly more due diligence.
Beginner Tip: Many major brokerages have “screeners” on their websites where you can filter for international mutual funds or ETFs based on region, holdings, and fees. This is a great way to narrow down your options.
Important Considerations Before Investing Internationally
Before diving headfirst into international stocks, keep these factors in mind:
- Increased Risk: Emerging markets and certain foreign companies can carry higher political, economic, or currency risk compared to US stocks. Careful research is crucial.
- Additional Research: It’s harder to find reliable information on some foreign companies or their home countries compared to US-based companies. You need to be prepared to do your homework.
- Tax Implications: Foreign investments might trigger additional taxes or reporting requirements. Consulting with a tax advisor is often beneficial. You might want to read more on the best order of accounts when investing or how to decide whether or not to sell your stocks.
Is International Stock Investing Right for You?
Not every investor needs the same level of international exposure in their portfolio. Here are some questions to help you decide if adding international stocks makes sense for you:
- Risk Tolerance: Can you handle increased volatility? International stocks, especially those in emerging markets, can experience sharp swings.
- Investment Time Horizon: International investing is best suited for long-term goals (5+ years or more). This allows you to ride out any short-term market fluctuations.
- Portfolio Allocation: A common recommendation is to allocate up to 20% of your stock portfolio to international investments. However, this can be adjusted based on your individual circumstances.
It’s always wise to consider your overall financial plan and goals before adding new types of investments to your portfolio. If you’re unsure, consult with a financial advisor.
Conclusion
International stocks offer a compelling way to enhance your portfolio’s growth potential and reduce your overall risk through diversification. While they come with certain added complexities, the potential rewards make them worth serious consideration.
Here’s a recap of the key reasons to think about investing in international stocks:
- Diversification: Reduce the risk of having all your investments tied to one country’s economy.
- Growth Opportunities: Tap into fast-growing markets around the world.
- Currency Advantage: Potentially benefit from favorable exchange rates.
If you decide to explore international investing, start with a well-researched international mutual fund or ETF. This offers an easier entry point with built-in diversification. As you gain experience and confidence, you might explore individual stocks or more targeted funds specific to certain countries or regions.
Actionable Step: Take some time to read about a few top-rated international funds to get a feel for where they invest and what sectors they focus on. It’s a great way to start exploring this exciting part of the investing world!