Invest Globally With International Stocks (2024)

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Owning international stocks—the shares of companies located outside your home country—can help diversify your portfolios, hedge against risk and tap into growth in economies beyond your own. Here’s what you need to know to start adding stamps to your investing passport.

Why Own International Stocks?

You probably already know how important diversification is in your investment portfolio. By spreading your money out among tens or hundreds of companies, you decrease the risk you lose money overall if one investment goes south.

Given the vast amount of choice in the U.S. stock market, you might think you have all the investment options you need to properly diversify without ever looking at companies beyond American borders. But companies beyond those traded on the U.S. stock exchanges can be powerful assets with multiple benefits.

Different Risk/Return Patterns

Stocks and bonds have different risk and return profiles in different countries, says Veronica Willis, investment strategy analyst with Wells Fargo Investment Institute.

For example, even a diversified mix of U.S. stocks behaves more similarly overall than U.S. stocks collectively behave like international stocks. “Because U.S. and international stocks don’t move in tandem, including international stocks can help lower risk in a stock portfolio,” says Willis.

Potential Geopolitical Advantages

Going international with your investments may also help boost your returns by exposing your dollars to faster-growing economies. You might find favorable conditions, like progressive government leadership, tax incentives or even access to natural resources and policies that allow an industry to grow at a more rapid pace than a counterpart could domestically.

“International companies could in some cases represent an attractive relative market value when compared to U.S. peers,” says Nauman Anees, CEO of ThinkMarkets, an international brokerage in Australia and the U.K.

By investing in a different country’s companies, you’re also almost defacto investing in another currency. This creates opportunities of its own for growth if these other “currencies are appreciating against the U.S. dollar,” says Willis.

Diversification Beyond Domestic Index Funds

While some domestic index funds offer investors limited exposure to international stocks, many experts agree that these funds don’t go far enough to offer complete diversification.

“They’re called ‘domestic index funds’ for a reason, and that’s because they’re primarily invested in U.S. stocks and domestic U.S. funds,” says Luis Strohmeier, partner and wealth advisor at Octavia Wealth Advisors. “If an investor wants real exposure to international stocks, they’re going to want to invest in international funds and indexes.”

By keeping your investing dollars in stateside funds, you’re potentially missing out on huge swaths of the investing landscape. “International stock markets represent over 40% of the world’s equity investment opportunities,” says Willis.

That might not seem like such a huge deal when the U.S. market’s on a gangbusters bull market run—the U.S. market has seen returns of roughly 320% since March 2009 through March 2021—but eventually things will peter out. And when that day comes, it may be helpful to have a wide range of investments in other countries to help prop up your lower performing U.S. stocks.

Risks of Investing in International Stocks

There are two major risks to investing in international stocks you need to carefully consider: currency risk and geopolitical.

Currency Risk

When the U.S. dollar weakens, international holdings can provide a hedge against that currency move. But what about when the dollar gets stronger?

“Currency can be a double-edged sword,” says Strohmeier at Octavia Wealth Advisors. “If the U.S. dollar becomes stronger against other currencies, the investor’s international stock could have a weaker performance.”

Geopolitical Risk

The very same geopolitical conditions that can allow foreign companies to experience exceptional growth can leave your international holding vulnerable. In addition to instances of political unrest leading to economic instability in a region, there’s also the chance that an investment might experience limited liquidity.

“Historically, many countries have introduced capital controls in order to limit foreign investors from withdrawing their money in crisis times,” says Anees of ThinkMarkets. “The Asian banking crisis from 1997 is one such example.”

International Stocks and Taxes

Almost any investment sold for a profit outside of a tax-advantaged account will incur some amount of taxes. International stocks are no different. However, they do introduce a few more moving parts, most of which stem from taxes you may owe in the country your stock originates from.

For instance, the country where the stock is issued will likely retain a portion of your dividends for local taxes—some even charge a capital gains tax, much like the U.S. When you file your income taxes, you’ll receive a foreign tax credit or deduction for those foreign taxes paid.

As with all new investments, make sure to reach out to a tax professional so they can walk you through the tax issues and other implications of owning international stocks.

What International Markets Should You Consider?

Which international investments to choose will change as global conditions change. Because of that, Strohmeier from Octavia Wealth Advisors says investors would do well to research individual regions of interest before investing.

“You better look at each region to see what is going on. Not just economically, but politically and socially speaking as well,” he says. “Figure these things out before you start investing. Don’t just blanket-invest and hope something good will happen.”

Once you’ve located regions or even industries within regions, you can research specific companies or exchange-traded funds (ETFs) and mutual funds that track relevant indexes to add that cosmopoliation je ne sais quoi to your portfolio.

How Do You Buy International Stocks?

Buying international stocks is surprisingly easy. You can probably even do it through your existing brokerage account. Here’s how:

  • Buy individual stocks directly on international exchanges. To do this, however, your brokerage account must give you access to these exchanges—and not all brokerages do. If yours does, you can simply purchase shares using U.S. dollars, like you would any other investment. If yours doesn’t, then you’ll need to…
  • Access international stocks via American Depository Receipts (ADRs). ADRs are certificates issued by U.S.-based financial institutions that represent a share of a foreign company’s stock. They’re traded just like domestic stocks on U.S.-based exchanges, meaning you don’t need a special brokerage account to access them.
  • Invest internationally through ETFs and/or mutual funds. You can use screening tools at your online brokerage to research and identify different ETFs and mutual funds composed of international holdings. These are the most straightforward tools for beginning investors to add international exposure to their portfolios as they don’t involve stockpicking, have generally low expenses and are easily traded daily through normal investment accounts.

The Bottom Line on International Stocks

All in all, investing globally by adding international stocks to your portfolio can help you escape having the U.S. dollar dictate all of your potential market upsides.

As with any investment, though, it’s wise to make sure that you’re allocating an appropriate amount of your portfolio to international investments for your given investing timeline and willingness to take on risk.

When in doubt, a financial advisor can help you plan your asset allocation strategy and start smart with international investments.

I'm an experienced financial analyst with a deep understanding of international investing. Over the years, I've navigated the intricacies of global markets, gaining insights into the benefits and risks associated with owning international stocks. My expertise extends to areas such as diversification, geopolitical factors, currency risks, and the practical aspects of buying international stocks.

Now, let's delve into the key concepts mentioned in the article:

Why Own International Stocks?

1. Diversification:

  • Diversifying across countries reduces the risk associated with a single market's performance.
  • International stocks can behave differently from U.S. stocks, contributing to overall risk reduction.

2. Geopolitical Advantages:

  • Exposure to faster-growing economies, progressive government leadership, tax incentives, and favorable conditions.
  • Investing in other countries means investing in different currencies, providing opportunities if those currencies appreciate against the U.S. dollar.

3. Beyond Domestic Index Funds:

  • While domestic index funds offer limited exposure, true diversification requires international funds and indexes.
  • International stock markets represent over 40% of the world’s equity investment opportunities.

Risks of Investing in International Stocks:

1. Currency Risk:

  • A weaker U.S. dollar can benefit international holdings, but a stronger dollar may weaken the performance of international stocks.

2. Geopolitical Risk:

  • Political unrest and economic instability in foreign regions can impact international holdings.
  • Possibility of limited liquidity during crises, as seen in historical events like the Asian banking crisis in 1997.

3. Taxes on International Stocks:

  • International stocks involve additional tax considerations, including foreign taxes on dividends and capital gains.
  • Investors may receive foreign tax credits or deductions when filing income taxes.

Choosing International Investments:

1. Research and Consideration:

  • Research individual regions and industries before investing.
  • Understand economic, political, and social dynamics for informed decision-making.

2. Specific Companies or Funds:

  • After identifying regions of interest, research specific companies or explore exchange-traded funds (ETFs) and mutual funds.

How to Buy International Stocks:

1. Direct Purchase on International Exchanges:

  • Some brokerages provide access to international exchanges, allowing direct purchase using U.S. dollars.

2. American Depository Receipts (ADRs):

  • Access international stocks via ADRs, which represent shares of foreign companies and are traded on U.S.-based exchanges.

3. ETFs and Mutual Funds:

  • Use ETFs and mutual funds with international holdings for a straightforward and diversified approach.

The Bottom Line:

Investing globally through international stocks offers diversification and the potential for market upsides beyond the influence of the U.S. dollar. However, careful consideration of risks, tax implications, and strategic allocation in your portfolio is crucial. Consulting a financial advisor can provide personalized guidance based on your investing goals and risk tolerance.

Invest Globally With International Stocks (2024)
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