American investors often keep all their money in US stocks. But the US represents only about 60% of global stock market value. International investing adds diversification and opportunities you can't get at home.
Why Invest Internationally?
1. True Diversification
US and international markets don't always move together. When one struggles, the other may thrive.
Example decades:
- 2000-2009: International outperformed US
- 2010-2019: US outperformed international
- Long-term: Similar returns
2. Access to Growing Economies
Emerging markets (China, India, Brazil) have faster GDP growth than developed economies.
3. Currency Diversification
Holding international stocks means holding other currencies. If the dollar weakens, your international holdings gain value in dollar terms.
4. Broader Opportunity Set
Many world-class companies are based outside the US. Missing them limits your portfolio.
Types of International Investments
Developed Markets
- Europe (UK, Germany, France)
- Japan
- Australia, Canada
- Similar to US in economic development
- Lower risk, more stable
Emerging Markets
- China, Taiwan, India
- Brazil, Mexico
- South Africa, Southeast Asia
- Higher growth potential
- Higher volatility and risk
Frontier Markets
- Even less developed than emerging
- Nigeria, Vietnam, Bangladesh
- Highest risk/reward
- Very small allocation if any
How Much International?
Traditional Recommendation
30-40% of your stock allocation in international
Example portfolio:
- Total stocks: 80%
- US stocks: 50-55%
- International developed: 20-25%
- Emerging markets: 5-10%
- Bonds: 20%
"Just US" Arguments
Some argue against international:
- US multinationals already have global exposure
- International has underperformed recently
- Currency risk adds complexity
Counter-Arguments
- Past performance doesn't predict future
- Concentration risk is real
- Lower valuations internationally may mean better future returns
Pro Tip
Even a modest 20-30% international allocation reduces portfolio risk through diversification.
Easy Ways to Invest Internationally
Total International Stock Funds
One fund covers developed and emerging markets:
- VXUS (Vanguard Total International)
- IXUS (iShares)
- Expense ratios around 0.07-0.11%
Target Date Funds
Already include international allocation:
- Typically 30-40% of stocks are international
- Automatically rebalanced
Separate by Region
For more control:
- VEA/IEFA (Developed international)
- VWO/IEMG (Emerging markets)
Considerations for International Investing
Currency Risk
When the dollar strengthens, international returns look worse in dollar terms (and vice versa).
- Long-term: Tends to even out
- Short-term: Can create volatility
You can hedge currency risk with hedged funds, but most experts suggest accepting it for diversification benefits.
Foreign Tax Withholding
Many countries withhold taxes on dividends:
- Can often claim Foreign Tax Credit on US returns
- More significant in taxable accounts
- Less impact in retirement accounts
Where to Hold International
Taxable accounts: Good choice—Foreign Tax Credit helps IRAs: Also fine—can't use Foreign Tax Credit but still diversified
Common Mistakes
1. Chasing Recent Performance
International underperformed for a decade. Some investors abandoned it right before it potentially does better.
2. Overweighting Emerging Markets
Exciting growth stories, but high volatility. Keep emerging under 10% of total portfolio.
3. Ignoring International Bonds
If you hold bonds, consider some international bond exposure (10-30% of bonds).
4. Too Much Home Country Bias
Americans typically over-weight US stocks. Canadians over-weight Canadian stocks. It's natural but reduces diversification.
Emerging Markets: Special Considerations
Higher Potential Returns
Growing economies, expanding middle classes, urbanization
Higher Risks
- Political instability
- Currency volatility
- Less regulatory protection
- Lower corporate governance standards
Appropriate Allocation
For most investors: 5-10% of total stock allocation
The Bottom Line
International investing provides diversification that US-only portfolios lack. Aim for 20-40% of your stock allocation in international funds, with the majority in developed markets and a smaller portion in emerging markets. Use low-cost index funds and rebalance periodically.