Most investors have a home country bias, overweighting domestic stocks and missing opportunities abroad. International diversification can reduce portfolio risk, improve returns, and provide exposure to faster-growing economies. Here is how to think about global investing.
Why Invest Internationally?
Diversification Benefits
- Different economic cycles: Countries do not all grow or shrink together
- Currency diversification: Not all eggs in one currency basket
- Reduced correlation: International stocks move differently than domestic
- Broader opportunity set: Many great companies are headquartered abroad
Growth Opportunities
- Emerging markets: Faster GDP growth in developing economies
- Demographics: Younger populations in emerging markets
- Rising middle class: Expanding consumer bases globally
- Industry leaders: Some sectors dominated by foreign companies
Key statistic: The US represents roughly 60% of global stock market value, meaning 40% of investment opportunities exist outside US borders. Ignoring international stocks means missing nearly half the world's publicly traded companies.
Types of International Investments
Developed Markets
Mature economies with established markets:
- Europe: UK, Germany, France, Switzerland
- Asia-Pacific: Japan, Australia, Singapore, Hong Kong
- Characteristics: Stable, regulated, liquid markets
- Risk level: Similar to US with currency risk added
Emerging Markets
Developing economies with higher growth potential:
- Major markets: China, India, Brazil, Taiwan, South Korea
- Characteristics: Higher growth but more volatility
- Risks: Political instability, currency fluctuations, regulatory uncertainty
- Opportunity: Faster-growing economies and demographics
Frontier Markets
Even smaller, less developed markets:
- Examples: Vietnam, Nigeria, Bangladesh, Kenya
- Characteristics: Very high growth potential, limited liquidity
- Suitable for: Small allocation for adventurous investors
How Much International Exposure?
Market-Weight Approach
Hold international stocks proportional to their global market share:
- US: approximately 60%
- International developed: approximately 30%
- Emerging markets: approximately 10%
Common Recommendations
- Vanguard: 40% international
- Fidelity: 30-40% international
- Academic research: 20-40% international for US investors
Practical Guidelines
- Minimum: At least 20% international
- Moderate: 30-40% international is reasonable
- Maximum: Some argue up to 50% is justified
Ways to Invest Internationally
International Index Funds and ETFs
Simplest and most common approach:
- Total international fund: One fund covers all non-US markets
- Developed markets fund: Focuses on established economies
- Emerging markets fund: Targets developing economies
- Regional funds: Europe, Asia-Pacific, Latin America
American Depositary Receipts (ADRs)
- Foreign company shares traded on US exchanges
- Trade in US dollars during US market hours
- Major foreign companies often have ADRs
- Easier for individual stock picking abroad
Direct Foreign Stock Purchase
- Buy shares on foreign exchanges
- Requires international brokerage access
- Currency conversion involved
- More complex but offers full access
Risks of International Investing
Currency Risk
Exchange rate fluctuations affect returns:
- Foreign gains can be reduced if dollar strengthens
- Foreign losses can be amplified if dollar strengthens
- Can also work in your favor when dollar weakens
- Hedged funds available to eliminate currency risk
Political and Regulatory Risk
- Government policy changes
- Nationalization of industries
- Capital controls restricting money flows
- Different accounting standards and transparency
Liquidity Risk
- Some markets less liquid than US
- Wider bid-ask spreads
- Harder to exit positions quickly
- Most significant in frontier markets
Information Risk
- Less analyst coverage of foreign companies
- Language barriers for research
- Different disclosure requirements
- Time zone challenges for monitoring
Building International Exposure
Simple Two-Fund Approach
- US total market fund: 60-70%
- Total international fund: 30-40%
- Minimal complexity, broad coverage
Three-Fund Approach
- US total market: 50-60%
- International developed: 20-30%
- Emerging markets: 10-15%
More Detailed Approach
- US total market: 50%
- European stocks: 15%
- Pacific developed: 10%
- Emerging markets: 15%
- International small cap: 10%
Common Mistakes
- Zero international: Missing diversification and opportunities
- Chasing recent performance: Rotating into whatever region did well
- Ignoring costs: Some international funds have high expense ratios
- Over-allocating to familiar names: Just buying a few ADRs is not diversified
- Timing currency moves: Very difficult to predict exchange rates
Track Your Global Diversification
Pro Trader Dashboard shows your international exposure and geographic allocation.
Summary
International diversification is an important component of a well-constructed portfolio. Aim for 20-40% international exposure to capture global opportunities and reduce home country risk. Use low-cost international index funds for easy implementation. Include both developed and emerging markets for comprehensive coverage. Accept that international investing adds currency and political risks but also provides diversification benefits. Maintain your target allocation through market cycles rather than chasing recent performance.
Learn more: asset allocation guide and portfolio diversification guide.