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Updated on Wednesday, January 16, 2019
Designing an investment portfolio that works for you can take some time, but experts agree that one thing is essential: diversification. Because different asset classes respond to market conditions differently, putting your money in several pots is a great way to make sure you’ve got a balanced approach. While a market situation can cause one asset class to fall, it may lead another to rise, leaving you with a return that’s balanced between the two.International stocks (that is, stocks issued by non-U.S. corporations) are one category of assets to consider adding to your portfolio. Over the past several years, ownership of international stocks has fallen slightly. In the under-35 set, for instance, the level of international stocks held has fallen from 21% in 2009 to 13% in 2017, according to Fidelity research. In households ages 35 to 50, the level of international stocks held has fallen from 18% to 15%.
But international stocks can add real value to your mix. Here’s what you should know about them.
Why add international stocks to your portfolio?
Investing all your eggs in one basket is a recipe for unbalanced disaster — you might do very well, but you might just as easily do very poorly. Spreading your money over multiple categories of investments is the way to go, and international stocks and bonds offer a different sort of investment than the domestic variety.
“International stocks and bond are going to react differently to the same sort of economic and market forces and stimuli than just investing in the United States would,” said Thomas Rindahl, a financial planner in Arizona. “They will then provide a smoother overall ride and less of the roller coaster than an investment portfolio that’s invested strictly in one country or one type of asset class.”
And when you invest internationally, you gain access to companies in developed countries (which might be doing very well) and companies in emerging markets (which have the potential to do very well), and there are a lot of upsides to that.
What are the risks?
Like any investment, there are risks to letting your money ride on international equities. First, there’s the political risk inherent in having your money in another country. That nation could decide it no longer wants to be friendly toward U.S. businesses or change something in its structure that affects your investment; trade or tariff wars could also impact the way your stocks perform.
Second, there’s currency risk: the returns you’re getting aren’t in U.S. dollars — they’re in whatever foreign currency applies and must be converted to dollars based on the current exchange rate. “Based on the valuation of that currency versus the dollar, those returns can be quite muted — or amplified, depending on how the currency is going,” Rindahl said.
Last, it’s worthwhile to understand that companies in other countries aren’t held to the same reporting standards that U.S. companies are, so the information you’re able to get may not be comparable — or even totally accurate.
“You have differences in transparency of how corporations are taking care of their books and what kind of accounting practices are allowed and acceptable in those countries,” Rindahl said. “All of this can potentially be a risk from the standpoint of not knowing whether or not a company is fairly valued.”
How do you buy foreign stocks?
Unless you’re prepared to do your own serious due diligence, investing in international stocks looks much the same as investing in domestic stocks — you’re often better off investing via international mutual funds or ETFs.
If you’re going the easy route, you could potentially choose a target date fund and call it a day. “A target date fund will have international funds in there, and you will be diversified that way,” said Dennis Nolte, a financial planner in Winter Park, FL.
If you’re investing more intentionally, there are a variety of low-fee mutual funds and ETFs that invest in international stocks, both developed and emerging market. Some examples: the Vanguard Total International Stock ETF, the iShares Core MSCI International Developed Markets ETF, or the Schwab International Equity ETF.
What should you know about fees?
As with any mutual fund or ETF, keep an eye on the expense ratio, which is how much it costs to run that investment mix every year. The lower the expense ratio, the higher your returns. Luckily, it’s possible to get international mutual funds or ETFs with very low fees. “ETFs that invest internationally can be had in the single-digit basis points or even low double digits, like 5 to 15 basis points,” said Chris Chen, a financial planner in Waltham, MA.
Beyond fees, however, you may want to do a little reading about taxes. With some international investments, you’ll lose a percentage of your dividends or capital gains distributions to foreign taxes. “You may want to delve a bit more deeply [into the investment] and look at the history of the distributions,” Nolte said. “This is where reading the prospectus is an interesting thing on any kind of mutual fund. They’ll give you an expectation on what may happen or what might be likely.”
To keep it simple, it may also be best to own your international stocks in a non-taxable account (such as an employer-sponsored retirement account or IRA). Otherwise, the taxes on your international investments could potentially trigger different reporting requirements.
Overall, international stocks are a good way to branch out and diversify your investment portfolio. You’ll access companies and industries that may react differently to world events than domestic stocks, broadening your reach. If you’re unsure of how to start, talk to your financial advisor about the best way for you to dive in.