International Funds: Worth The Investment?

Investing in international funds is a topic that sparks debate among investors. Some investors, like Jack Bogle and Warren Buffett, dismiss the need for international diversification, while others argue that it is a crucial component of a well-rounded portfolio. So, is it really necessary to invest in international funds?

There are several compelling reasons why investors might consider allocating a portion of their portfolio to international funds. Firstly, international investing provides diversification, which is essential for long-term investors as it helps to reduce risk. By investing in international funds, investors can spread their risk across different countries, sectors, and currencies, rather than being overly reliant on the performance of a single market, like the US. This becomes particularly important when considering that markets outside the US don't always rise and fall simultaneously with the domestic market, so owning a mix of international and domestic securities can help smooth out the volatility in an investment portfolio.

Another reason to consider international funds is the potential for growth, especially in emerging markets. Countries with developing economies, such as India, China, and Brazil, often offer higher growth potential over the long term due to their increasing consumer base and improving economic conditions. By investing in international funds, investors can take advantage of these growth opportunities, which may be less correlated with the performance of US stocks.

However, investing in international funds also comes with certain risks and challenges. One of the main concerns is the lack of information available about companies outside the US, as they may not provide the same level of disclosure as US public companies. Additionally, international investing can be more costly and may involve navigating different regulations, currencies, and market operations.

In conclusion, while investing in international funds is not mandatory, it can provide significant benefits to an investment portfolio. By diversifying across global markets and seizing growth opportunities in emerging economies, investors can potentially enhance their returns and mitigate risks. However, it is essential to carefully consider the risks and conduct thorough research before venturing into international investments.

International investments can help US investors spread their risk

International investments also provide access to sectors that may be under-represented in US-centric indexes, such as financials, consumer cyclicals, and industrials. For example, while the S&P 500 index fund has a significant portion of its holdings in technology stocks, international ETFs tend to have a lower concentration in this sector.

Additionally, international investments can offer higher yields than US investments. For instance, the iShares MSCI EAFE Value ETF, which has a heavy weighting in financials, yields 4.4%, compared to the Financial Select Sector SPDR ETF (XLF) at 2%.

It's important to note that the performance of international and US stocks tends to be cyclical, with one typically outperforming the other for several years before the cycle rotates. Therefore, investing in international stocks can help ensure that US investors do not miss out on significant gains when the market corrects.

However, investing internationally can be more complex and expensive than investing in US companies. US investors may encounter challenges such as accessing information in different languages and navigating foreign markets with lower trading volumes and different regulations.

International investments can help investors take advantage of growth in foreign economies

Firstly, international investments can provide investors with enhanced diversification. Markets outside the US do not always rise and fall at the same time as the domestic market. Therefore, owning both international and domestic securities can balance out some of the volatility in an investor's portfolio.

Secondly, international investments can offer sector diversification. For example, international ETFs can help reduce an investor's exposure to the technology sector, which dominates US-centric indexes. In contrast, international ETFs tend to have greater exposure to sectors such as financials, consumer cyclicals, and industrials.

Thirdly, international investments can provide investors with access to higher yields. For example, the iShares MSCI EAFE Value ETF yields 4.4%, compared to the S&P 500, which yields just 1.9%.

Finally, international investments can be a good buffer against US-specific political events and economic fluctuations. For example, in 2017, international value stocks rose 26%, beating large US company stocks and small US stocks.

However, it is important to note that investing in international markets also comes with additional risks, including political, liquidity, and currency risks. These risks can create price inefficiencies that require specialized local knowledge, careful research, and efficient trading to navigate successfully.

International investments can provide sector diversification

International investments can be a great way to diversify your portfolio and reduce risk. By investing in foreign companies and markets, you can spread your investment risk and gain exposure to different sectors and industries that may not be as prominent in the US market.

For example, while the US market is heavily weighted towards technology stocks, international markets may offer more opportunities in sectors such as financials, consumer cyclicals, and industrials. This helps to reduce your sector exposure and lower the risk of your portfolio being affected by industry-specific downturns.

Additionally, international markets can provide a buffer against US-centric political events and economic fluctuations. Markets outside the US don't always rise and fall at the same time as the domestic market, so owning a mix of international and domestic securities can help to level out the volatility in your portfolio.

When investing internationally, you can also take advantage of the growth potential in emerging markets. Countries with developing economies, such as India, China, and Brazil, often have young and growing populations with increasing incomes, which can drive economic growth and provide compelling investment opportunities.

However, it's important to keep in mind that international investing also comes with additional risks. These include political instability, currency fluctuations, lower liquidity, and limited information availability. As such, it's crucial to conduct careful research and due diligence before investing in foreign companies and markets.

International investments can offer higher yields

Investing internationally can be a great way to diversify your portfolio and reduce risk. Markets outside the United States don't always rise and fall at the same time as the domestic market, so owning both international and domestic securities can level out some of the volatility in your portfolio.

Diversification

By investing in an international mutual fund or ETF (exchange-traded fund), you gain access to hundreds or even thousands of foreign securities. This diversification can be beneficial as it spreads out your portfolio's risk more effectively than if you only owned domestic securities.

Higher Yields

International stocks can offer higher yields than their domestic counterparts. For example, the iShares MSCI EAFE Value ETF yields 4.4%, which is significantly higher than the S&P 500, which yields just 1.9%.

Reduced Sector Exposure

Investing in international stocks can help reduce your exposure to specific sectors. For instance, the S&P 500 index fund has a high concentration of technology stocks, with 26.8% of its holdings in this sector. In contrast, international ETFs like the SPDR Portfolio Developed World ex-US have a lower allocation to technology, at just 8.4%.

Long-Term Growth

While short-term obstacles and geopolitical tensions may impact international stocks in the near term, the long-term growth prospects for these stocks remain positive. Fidelity researchers expect international stocks to potentially outperform US stocks over the next 20 years, particularly in emerging markets.

Currency Fluctuations

International investments are exposed to currency fluctuations, which can impact the value of your investment. However, this risk can be mitigated by considering international investments hedged in US dollars.

In conclusion, investing in international markets can offer higher yields and diversification benefits. By reducing sector exposure and providing access to emerging markets with strong growth potential, international investments can be a valuable component of your portfolio.

International investments can be a buffer against US-centric indexes

International stocks can offset US political events and the economy. They can also help reduce sector exposure. For example, the S&P 500 index fund SPDR S&P 500 ETF Trust put 26.8% of its holdings in technology stocks. In contrast, the SPDR Portfolio Developed World ex-US ETF has a technology concentration of just 8.4%. The latter ETF puts 23% of its weighting in financials, with its top four holdings—Nestle, Novartis, Samsung, and Roche—holding just 5% of its value.

International investments can also help investors diversify their portfolios. Markets outside the US do not always rise and fall at the same time as the domestic market, so owning both international and domestic securities can level out some of the volatility in a portfolio.

In addition, international investments can provide exposure to growing markets. The long-term fundamentals in international markets, especially emerging markets, look promising. Growing middle-class populations in Africa, Latin America, the Middle East, and Asia are likely to propel some markets to greater annual GDP growth than the United States.

It is worth noting that international investing does come with additional risks, including access to different information, higher costs, changes in currency exchange rates, and different market operations.

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