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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 Should You Buy 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
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.
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.”
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 Investing In?
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.