International Funds: Worth The Investment Risk?

Investing in international funds can be a great way to diversify your portfolio and take advantage of growth in foreign economies, especially in emerging markets. However, it's important to consider the risks associated with international investing, including access to information, costs, currency exchange rates, market value changes, and political, economic, and social events. Should you stop investing in international funds? Let's explore the topic further to help you make an informed decision.

International investing may help US investors spread their investment risk

International investing can be a great way for US investors to spread their investment risk. By diversifying their portfolios and investing in foreign companies and markets, US investors can reduce their exposure to volatility and improve their returns.

One of the key benefits of international investing is the potential for growth in emerging markets. These markets, such as India, China, Brazil, Russia, and South Africa, have delivered impressive returns in recent years, and are projected to become major drivers of global growth. By investing internationally, US investors can take advantage of these growth opportunities and spread their risk across multiple markets.

Another advantage of international investing is the ability to access different sectors and risk classes. For example, small company stocks in international markets, particularly in emerging markets, can offer higher returns and more volatility. By adding these stocks to their portfolios, investors can further diversify their investments and reduce their overall risk.

Additionally, international investing can help US investors mitigate currency risk. As the US dollar strengthens or weakens against other currencies, investors can adjust their portfolios to take advantage of favourable exchange rates. This can be particularly beneficial for long-term investors who are looking to reduce their risk and maximise their returns.

It's important to note that international investing also carries its own set of risks. These include currency fluctuations, political and economic events, and differences in market operations and regulations. Investors need to carefully consider these risks and seek professional advice before investing.

Overall, international investing can be a valuable tool for US investors to spread their investment risk and access growth opportunities. By diversifying their portfolios and investing in foreign markets, investors can reduce their exposure to volatility and improve their long-term returns.

International funds can help investors make the most of many economic environments

International funds also give you access to foreign markets and allow you to invest in different sectors and risk classes. This is especially true for emerging markets, which are considered to be transitioning into developed markets and may be experiencing rapid growth. Examples of emerging markets include India, China, Egypt, South Africa, Mexico, and Russia.

Additionally, geographic diversification can help investors recover from a local market crisis and take advantage of global stock markets. It also allows investors to earn from the market cycle of other countries' economies.

However, it is important to note that international funds carry their own risks, such as currency fluctuations, political issues, and liquidity concerns. Due diligence is required to understand the market movement of these markets and the economic changes and their impact on fund investments.

International markets don't always rise and fall in sync with US markets

History suggests that international stocks may soon have their day in the sun. Since 1975, the outperformance cycle for US vs. international stocks has lasted an average of eight years. We’re currently 13.3 years into the current cycle of US outperformance.

Vanguard recommends that at least 20% of your overall portfolio should be invested in international stocks and bonds. However, to get the full diversification benefits, consider investing about 40% of your stock allocation in international stocks and about 30% of your bond allocation in international bonds.

International mutual funds are a good option for investors looking for long-term investments. These funds are suitable for investors with a high-risk tolerance level and a good understanding of global markets.

There are additional risks to investing in international markets, including currency fluctuations, different information access, higher costs, and changes in market value due to political, economic, and social events.

International stocks are cheaper, pay higher dividends, and have lower valuations

International stocks are an attractive option for investors seeking to diversify their portfolios and access foreign markets. While investing internationally comes with its own set of risks, it offers several benefits, including cheaper stock prices, higher dividend yields, and lower valuations.

Firstly, international stocks are often cheaper than their domestic counterparts. This means that investors can purchase shares in foreign companies at a lower price, potentially resulting in higher returns if the stocks appreciate in value.

Secondly, international stocks tend to pay higher dividend yields. Dividends are a way for companies to distribute profits to their shareholders. By investing in international stocks, investors can benefit from higher dividend payments, which can provide a steady income stream or supplement their total return.

Lastly, international stocks often have lower valuations compared to domestic stocks. Valuation metrics such as the price-to-earnings (PE) ratio are used to assess the relative value of a stock. Lower valuations in international markets suggest that investors may be able to purchase stocks at more attractive prices, potentially leading to greater capital appreciation over time.

For example, as of 2023, several international stocks offered dividend yields of 3.5% or higher, with some even surpassing 6%. These include companies such as ASE Technology Holding Co. Ltd. (6.7%), Canadian Imperial Bank of Commerce (6.5%), and Petroleo Brasileiro SA (19.1%).

In conclusion, investing in international stocks can provide access to cheaper stock prices, higher dividend yields, and lower valuations. These factors can contribute to portfolio diversification, reduce domestic exposure, and potentially enhance overall investment returns. However, it is important to carefully consider the risks associated with international investing, such as currency fluctuations, political and economic events, and differences in market operations.

International investing has its own set of risks, including currency volatility and geopolitical disruptions

International investing has its own set of risks that investors should be aware of. Here are some key points to consider regarding currency volatility and geopolitical disruptions:

Currency Volatility

Currency volatility is a significant risk in international investing. When investing directly in foreign markets, you are exposed to fluctuations in currency exchange rates. This adds an extra layer of uncertainty to your investment, as the value of your returns can be impacted by the movement of exchange rates. For example, if you invest in a foreign stock and the value of the foreign currency decreases relative to your domestic currency when you sell the stock, your returns will be lower than expected.

Managing Currency Risk

To manage currency risk, investors can consider hedging their currency exposure. This can be done through various financial tools such as currency futures, options, and forwards. However, these strategies may be complex and unsuitable for individual investors. A more accessible option is to invest through currency exchange-traded funds (ETFs), which offer good liquidity and accessibility.

Additionally, investors can consider investing in American Depositary Receipts (ADRs). ADRs are issued by U.S. banks and represent foreign company stocks but are traded as U.S. stocks, eliminating foreign exchange fees. However, it's important to remember that investing in ADRs still carries currency risk, as the value of the ADR will be impacted by fluctuations in the exchange rate between the U.S. dollar and the foreign company's currency.

Geopolitical Disruptions

Geopolitical tensions can significantly impact international investing. Rising tensions between countries can lead to financial fragmentation, affecting cross-border investment, international payment systems, and asset prices. This, in turn, can fuel instability and increase banks' funding costs, reducing their lending to the private sector. Geopolitical disruptions can also affect supply chains and commodity markets, impacting domestic growth and inflation and further reducing banks' profitability and willingness to lend.

Other Risks in International Investing

In addition to currency volatility and geopolitical disruptions, there are other risks to consider when investing internationally:

• Higher transaction costs: Brokerage commissions and other fees, such as stamp duties and levies, tend to be higher in international markets.
• Liquidity risk: Especially in emerging markets, there may be difficulty in quickly selling an investment without incurring substantial losses due to political or economic crises.
• Information access: International investors may struggle to access information on foreign companies, especially if it is not available in English.
• Regulatory differences: Working with foreign brokers or investment advisers may pose challenges, as they may not be registered with the SEC or provide the same level of protection as brokers in the U.S.
• Market volatility: Political, economic, and social events in foreign countries can be difficult to predict and understand, and they can significantly impact market volatility.
• Legal remedies: Finding legal recourse outside of your home country can be challenging and complex.

Frequently asked questions