If you follow the rule that diversification helps reduce your risk and propel your gains — a philosophy that we agree with — then adding international stocks may be a strategy to include in your overall investment plan.
When you feel a reluctance to invest in international stocks, you’re not alone among your fellow Americans. There is a term for this: home-market bias. Nationwide Financial found that “the optimal allocation to international stocks — when returns are maximized and portfolio volatility minimized — is 40% of U.S. investors, on average, only allocate about 22% to foreign stocks.”
Bloomberg reports that the U.S. comprises about 50 percent of global stock market capitalization.
In fact, CNBC reports that, in the coming decade, international stocks have the potential to outperform domestic equities (the report states that The Vanguard Group recommends that better value equations should not be measured in trader’s days, or months, but over a full decade.).
The prediction: “international stocks will outperform U.S. stocks over the next ten years by a margin of 3%-3.5%.” Vanguard says that U.S. stockholders may actually be holding too many U.S. stocks and may need to consider asset-allocation changes.” While anything could happen over the next ten years, international stocks seem like a better bargain than US stocks at current valuations.
Investing in International Stocks the U.S-Registered Way
Adding international stocks to your portfolio does not have to bring on hassle and complication.
ETFs contain groups of stocks, which could help minimize your risk. Compare this to investing in only one stock. When you spread out your investments over many stocks, it’s called diversification.
ETFs are popular because they are a simpler way to build a portfolio than building and managing a portfolio with dozens or hundreds of individual stocks. If you’re interested including international stocks in your mix, many ETFs offer them. This may eliminate your need to have to search far and wide for international stocks.
ETFs are not all created the same, so make sure to investigate the ETF’s investment strategy, expense ratio, and track record to make sure it aligns with your goals.
U.S.-registered funds can track different types of international markets like developed, emerging or frontier.
Developed Markets have the capital markets and economies that are most like ours: developed. Think England, Australia, and Japan.
Emerging Markets are usually markets that are in the process of modernizing, often from an agricultural economy to a more industrial or technological-driven economy.
They usually want to adopt a free-market system and compete in the global economy but may have more volatile political climates or judicial systems that are not as robust as developed nations.
Frontier Markets are also known as pre-emerging markets, and are located in the developing world. You may imagine that markets like these are high risk, due to political and currency instability, and unestablished regulation. However, there are many investors who think a risk like this is worth taking.
The main advantage of international stocks is opportunity. “By ignoring investment opportunities outside of the U.S., you’re missing out on approximately half of the investable developed stock market opportunities in the world,” Elle Kaplan of LexION Capital writes in Forbes.
“International equities can provide an additional layer of diversification for investors’ profiles and can reduce risk while providing similar or greater returns. While U.S. equities are up, international ones can be down, and vice versa.”
The Risks of Investing in International Stocks
Countries undergoing transition, revolution, war or economic uncertainty may also be experiencing adverse economic effects and companies within those countries may be impacted. These days, news can change by the minute, and it’s difficult to keep on top of what’s happening when so much news is happening all at once.
Lack of financial information
Not every country practices and requires transparency in its investment markets. You may not always get the full story of what’s happening in a certain area, or receive the most accurate and up-to-date financial data, especially the way you come to expect it from American stock markets.
Not every stock exchange rivals the U.S. which is the largest stock exchange in the world. Certain international markets may lack a large amount of buyers and sellers that could make the market more efficient and active.
No equivalent of our SEC
Our SEC was created specifically to protect investors from criminal activity and fraud. However, most of its jurisdiction is in the U.S. market. Not all foreign countries have an equivalent watchdog.
Related Costs of Investing in International Stocks
International stock investing may cost a little more. This is due to possible foreign taxes on dividends earned outside the U.S., as well as transaction costs, brokers’ commissions and currency conversions.
A Well-Balanced Portfolio
A well-balanced portfolio includes both domestic and international equities, according to Justin Goodbread of Heritage Investors. The U.S. markets may have a different rhythm than international markets; investing in both hav the potential to give you the best of both worlds if one rises while the other falls.
A Word About Risk
Risks are a part of life. You can’t grow, change or improve without taking chances. What’s safe isn’t always what’s best. Sometimes if you want what’s best, you have to take some risks.
Just like in life, there are no guarantees when you take an investment risk, but if you can consider informed risks — based on research and experience — you may be able to better reach your financial goals.
Investing In International Stocks Through SoFi Invest
Our SoFi Financial Planners can help you sort out the questions and concerns you have about investing in international stocks. Our advisors make sense of the different types of investments available to you, including investing in international stocks.
That’s right, you’ll interact with an actual human being who provides personalized advice at no charge. It’s all based on your own unique financial situation and goals.
The ultimate goal is to invest so that your financial goals will be met, through strategic timelines and handy, easy-to-use tools that help you stay on track.
We believe the way to do that is to invest in thousands of stocks, so that your risk is minimized. We also regularly check up on and rebalance your portfolio, so that you don’t fall off track.
Become a SoFi member and pay absolutely no management fees. You’ll also get unlimited access to our SoFi Financial Planners, who help you create a workable plan and stick to it.
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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