While the US stock market is the largest in the world, it represents less than half of global market capitalization. International investing allows you to access growth opportunities around the world and reduce your dependence on any single economy. In this guide, we will explain how to add international exposure to your portfolio.
Why Invest Internationally?
International investing offers several important benefits:
- Diversification: Different markets often move independently, reducing overall portfolio volatility
- Growth opportunities: Emerging economies often grow faster than developed markets
- Currency diversification: Owning foreign assets provides exposure to different currencies
- Access to different industries: Some sectors are better represented in foreign markets
- Valuation opportunities: International stocks may be cheaper than US stocks at times
Key insight: The US market has outperformed international markets in recent years, but this has not always been the case. International diversification helps ensure you benefit regardless of which region leads.
Types of International Markets
Developed Markets
Countries with mature, stable economies and established financial systems:
- Europe: UK, Germany, France, Switzerland, Netherlands
- Pacific: Japan, Australia, Hong Kong, Singapore
- North America: Canada
Developed markets offer stability but typically slower growth than emerging markets.
Emerging Markets
Countries with developing economies and faster growth potential:
- Asia: China, India, Taiwan, South Korea, Indonesia
- Latin America: Brazil, Mexico, Chile
- Other: South Africa, Poland, Turkey
Emerging markets offer higher growth potential but with greater volatility and political risk.
Frontier Markets
The smallest and least developed markets, including Vietnam, Nigeria, and Bangladesh. These are typically only suitable for aggressive investors due to high risk and low liquidity.
How to Invest Internationally
International ETFs and Mutual Funds
The easiest way to invest internationally:
- Total International Stock Index: Broad exposure to all non-US stocks
- Developed Markets ETFs: Focus on Europe, Japan, Australia
- Emerging Markets ETFs: Focus on China, India, Brazil, etc.
- Regional ETFs: Target specific areas like Europe or Asia-Pacific
- Country-specific ETFs: Invest in a single country
American Depositary Receipts (ADRs)
ADRs are foreign stocks that trade on US exchanges in US dollars. Major companies like Toyota, Alibaba, and Nestle have ADRs, making them easy to buy through any US broker.
Direct International Investing
Some brokers allow you to buy stocks directly on foreign exchanges. This provides access to more companies but involves currency conversion and potentially higher fees.
Sample International Allocation
A balanced global portfolio might include:
- US Stocks: 60%
- Developed International: 25%
- Emerging Markets: 15%
Adjust based on your risk tolerance and market outlook.
Risks of International Investing
Currency Risk
When you invest in foreign stocks, currency movements affect your returns. A strong US dollar reduces returns from international investments when converted back to dollars.
Political and Regulatory Risk
Foreign governments may implement policies unfavorable to investors, nationalize industries, or restrict capital flows.
Economic Risk
Emerging markets are more vulnerable to economic crises, inflation, and debt problems.
Information and Transparency
Accounting standards and disclosure requirements vary by country. It may be harder to research foreign companies.
Liquidity Risk
Some foreign markets have lower trading volumes, making it harder to buy or sell at fair prices.
When International Investing Works Best
- Long-term horizon: Short-term returns are unpredictable; diversification benefits appear over time
- Regular rebalancing: Periodically adjust to maintain your target allocation
- Dollar cost averaging: Invest regularly rather than timing international markets
- Broad diversification: Avoid concentrating in a single country or region
Currency Hedging Considerations
Some international funds offer currency-hedged versions that eliminate currency fluctuations:
- Hedged funds: Remove currency risk but also remove potential currency gains
- Unhedged funds: Include full currency exposure, adding to both risk and return potential
- For long-term investors, unhedged funds are often preferred since currency movements tend to balance out over time
Track Your Global Portfolio
Pro Trader Dashboard helps you monitor your international investments, track currency exposure, and analyze your global diversification.
Summary
International investing provides valuable diversification and access to global growth opportunities. By combining developed and emerging market exposure through low-cost ETFs, you can build a truly global portfolio. While international investments carry unique risks like currency fluctuations and political uncertainty, these are manageable with proper diversification and a long-term perspective.
Want to learn more about diversification? Check out our guides on portfolio diversification and index fund investing.