Investors increasingly look beyond borders to diversify their portfolios and capture investment opportunities worldwide. Investing internationally provides several key benefits for investors willing to take on additional risk.
Diversification
One of the main reasons to invest internationally is to diversify your investment portfolio.
Different countries and regions offer exposure to diverse economies, markets, currencies, and types of risk. Investing in just one country or region concentrates your assets and may expose you disproportionately to that area’s economic and market risks.
By investing globally, you can gain exposure to growth opportunities in emerging markets and the relative stability of developed markets. Diversification across regions can help reduce overall portfolio risk and volatility.
Potential to increase returns
Investing internationally may (but is not guaranteed to) lead to higher returns. Developing and emerging markets often grow at a faster rate than mature economies. Investing globally allows you to participate in this higher growth potential.
International stocks also provide exposure to sectors that may be underrepresented domestically. For example, global natural resource and mining companies are predominantly based overseas.
Currency effects
Foreign investments provide exposure to different currencies. If the value of your home currency declines, foreign currency gains may offset those losses. Conversely, exposure to foreign currencies may increase risk.
Access to foreign investment vehicles
Investing internationally provides access to foreign investment products and strategies that may not be available in the United States, including certain mutual funds, exchange-traded funds (ETFs), and foreign stock exchanges like London Stock Exchange or Hong Kong Stock Exchange.
International bond markets also offer opportunities to diversify into different types of fixed-income assets. Foreign bonds can provide higher yields, often with a significantly increased risk of default.
How to Invest Internationally
Investing globally has never been easier. Here are some of the main options for accessing overseas investment opportunities:
- International Mutual Funds and ETFs – These pooled investment products hold a basket of securities from a specific country, region, or even the entire world. They provide instant diversification and are the most common route for U.S. investors seeking foreign assets.
- ADRs – American Depositary Receipts (ADRs) allow foreign companies to list their shares on U.S. exchanges. ADRs can be purchased just like regular U.S. stocks while providing exposure to foreign equities.
- Foreign Direct Investment – Investing directly in foreign stocks on overseas exchanges is more complex but can provide access to companies unavailable through ADRs.
- International Bonds – Foreign government and corporate bonds can be purchased individually or through mutual funds and ETFs. They provide fixed-income diversification.
- Offshore Investment Accounts – Wealthy investors sometimes open accounts with foreign brokerages or banks to gain access to local investment options. Strict reporting requirements apply.
- Global Real Estate – Real estate investment trusts (REITs) or direct property purchases allow exposure to overseas real estate markets.
Risks and Drawbacks
While investing internationally has benefits, there are also risks to consider:
- Currency risk – Fluctuations in exchange rates can impact returns. If the value of foreign currencies declines relative to your home currency, the value of your investments could also decrease.
- Political risk – Investing overseas exposes you to potential political instability, corruption, nationalization of assets, and other geopolitical risks.
- Regulatory risk – Differing laws, regulations, reporting standards, and accounting practices across countries can make international investing more complex and adversely affect your investments.
- Liquidity risk – Some foreign markets may have lower trading volumes and fewer buyers/sellers than more developed markets, making it more difficult to buy or sell securities.
- Information risk – Lack of transparency and less available public information on foreign companies can make it harder to research investments.
- Tax implications – There may be complex tax rules related to foreign investment income, capital gains, withholding taxes, etc.
- Fraud risk – Lower levels of regulation in some countries increase vulnerability to financial fraud. Looser accounting/auditing standards could hide problems.
Allocation to international investments
Vanguard recommends investing at least 20% of your overall portfolio in international stocks and bonds. However, to get the “full diversification benefits,” it recommends investing about 40% of your stock allocation in international stocks and about 30% of your bond allocation to international bonds.
How a financial advisor can help
Here are a few ways a financial advisor can help with international diversification:
- They can analyze your current asset allocation and risk tolerance and suggest appropriate amounts to invest internationally for proper diversification.
- They can suggest foreign bonds for greater diversification of your fixed-income portfolio.
- They can recommend international real estate investment trusts (REITs).
- They can advise on risks and opportunities in emerging markets.
- They can help manage currency risk.
- They can recommend global mutual funds or ETFs.
- They can help with tax compliance for foreign accounts and assets, especially if they are Certified Public Accountants or have specialized tax expertise.
Final thought
A tax-savvy financial advisor will look at your overall financial picture and incorporate appropriate international assets in a prudent way to meet your long-term goals.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.