The Value of Diversifying with International Stocks

When investors think about building a strong equity portfolio, U.S. stocks often dominate the conversation. The United States is home to many of the world’s most innovative, profitable and well-known companies, and has a history of delivering strong long-term returns. However, the United States is not the only country with successful, growth-oriented businesses. In fact, nearly half of the global equity market is located outside the United States, offering investors a much broader opportunity than in domestic markets alone.

Despite this reality, many investors stick to a home country bias. This behavioral tendency means they prefer companies headquartered in their own country because they’re more familiar and feel safer. Unfortunately, home country bias can unintentionally increase portfolio risk. A singular concentration of investments in one geographic region exposes investors to country-specific economic cycles, policy changes and market disruptions, while limiting access to attractive opportunities elsewhere in the world.

Global investing offers the following benefits:

• Overall Diversification – Spreading investments across different markets, sectors, industries, companies and currencies in various countries improves opportunities for higher growth potential while balancing risk.
• Highly Regarded Brand Names – Investing internationally offers access to a larger universe of well-established global brands. Household names such as Toyota, Nestlé and Samsung are headquartered outside the United States, yet they generate revenues throughout the world boasting strong balance sheets, consistent cash flow and favorable long-term prospects. International stocks offer investors exposure to global innovation and consumption trends beyond U.S. markets.
• Sector Diversification – In recent years, the U.S. stock market has become saturated with information technology and related industries – even among broad market index funds. While tech is a powerful growth driver, this concentration increases portfolio risk if the sector underperforms. International markets tend to have greater representation in other sectors, such as industrials, financials, materials and consumer staples, so adding international stocks can help diversify overall sector exposure.
• Currency Diversification – International investing exposes U.S. investors to foreign currencies, which reflect the economic conditions of their respective countries. Because currencies do not always move in tandem, holding assets denominated in multiple currencies can help reduce overall portfolio volatility. For example, if the U.S. dollar weakens, gains from foreign currencies may partially offset losses in U.S. dollar denominated investments. While currency movements can add risk in the short term, they may provide an additional layer of diversification over the long term.
• Country Diversification – International investing extends beyond developed markets to include emerging economies around the globe. Emerging markets are countries experiencing rapid economic growth, industrialization and rising household incomes. Examples include India, Brazil, South Korea and Taiwan. While emerging markets can offer higher growth potential, they also tend to be more volatile. For this reason, investors should consider allocating only a modest portion of their international exposure to emerging markets as part of a diversified strategy.

Diversify Risk Via Your Investment Vehicle

While international stocks offer diversification and growth potential, they also come with distinct risks, including regulatory differences, lower market liquidity and political instability. Also note that international investments may involve higher transaction costs compared to domestic securities, especially when purchasing individual foreign stocks

Investors can help mitigate these risks by choosing inherently diversified investment vehicles, such as international mutual funds and exchange-traded funds (ETFs). Broad index-tracking funds are often the most cost-effective way to gain exposure, while professionally managed mutual funds can actively navigate changing global conditions.

International stocks provide access to companies, markets and currencies that cannot be reached through domestic investments alone. When thoughtfully integrated into a portfolio, they may enhance diversification and improve long-term risk-adjusted returns.

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