International Equity: Diversify Your Portfolio, Grow Your Wealth

why invest in international equity

International equities are stocks purchased outside of the United States market. They are an essential part of a diverse portfolio, which is why experts recommend investing 20-40% of your overall portfolio in international markets. International equities can help to reduce the impact of regional and country-specific economic downturns and provide exposure to a wider array of economic and market forces across regions and nations.

U.S. investors are likely to be rewarded for holding international stocks in the decade ahead. Although there are risks associated with investing in international equities, such as currency exposure and political risk, the benefits of diversification and the potential for higher returns make a strong case for investing in international equities.

Characteristics Values
Diversification Exposure to a wider array of economic and market forces across regions and nations
Risk Mitigation Reduced volatility and improved risk-adjusted returns
Returns Higher expected returns and potential for outperformance
Growth Opportunities Access to new growth opportunities outside the domestic market, especially in emerging markets
Currency Exposure Exposure to foreign currencies, which can be beneficial when the dollar is weak
Political Risk Potential for massive returns in emerging markets, but higher risk due to political instability
Buyer Liquidity International equities may be less liquid and more difficult to offload than U.S. stocks
Geographic Diversification Reduced country/regional risk by investing in multiple markets and regions
Sector-Based Focus Opportunity to focus on specific sectors, such as energy, tech, agriculture, or real estate outside the U.S.

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International equities can lead to higher returns, especially in emerging markets

International equities can provide access to higher returns, especially in emerging markets.

Emerging markets are located in countries with developing capital markets and less stable economies. However, they are considered to be transitioning into developed markets and may be experiencing rapid growth. Examples include India, China, Egypt, South Africa, Mexico, and Russia.

Emerging markets have long attracted investors with the promise of superior growth opportunities. The long-term growth premium of emerging markets over developed markets has fluctuated over the last 50 years from as low as 1% to as high as 7%. Currently, it is around 2%.

Emerging markets often have high growth potential due to their developing economies and infrastructure. They may also have younger populations, which can contribute to economic growth. Additionally, emerging markets can benefit from a convergence of positive factors, such as increased capital expenditure, higher government spending, and robust consumption.

However, it is important to note that investing in emerging markets carries risks. These include foreign exchange rate risk, lax insider trading restrictions, difficulty in raising capital, poor corporate governance, and increased chances of bankruptcy. Political risk is also a factor, as emerging markets may experience more frequent government turmoil or upheaval.

Despite these risks, the potential for higher returns in emerging markets is significant. By investing in international equities, investors can balance the declines of one nation or region with the gains of another. This diversification can lead to higher overall returns and reduce the impact of regional and country-specific economic downturns.

In summary, international equities, particularly in emerging markets, can provide access to higher returns by leveraging the growth potential of developing economies and mitigating risks through diversification.

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International equities can help reduce risk through diversification

Diversification is a common goal for virtually every investor. By diversifying your portfolio, you significantly reduce the risk of failure and decline. International equities are an essential part of a diverse portfolio, and experts recommend investing around 30% (or more) of your portfolio in international markets.

U.S. equities are most exposed to the economic forces of the U.S. market. In contrast, international stocks can provide exposure to a wider array of economic and market forces across regions and nations. Different markets and economies often produce returns that vary from the U.S. market. By investing in international equities, you can spread your investments across multiple opportunities and benefit from the regions that are performing well at a particular time, while also offsetting areas that may be underperforming.

U.S. and international markets don't always move in the same direction. As one market goes down, the other may go up, or at least hold firm, providing stability to your portfolio. By investing in international markets, you can reduce the impact of regional and country-specific economic downturns.

International equities also create exposure to foreign currencies, which adds another layer of diversification.

However, it's important to note that investing in international equities does come with certain risks, such as currency exposure and political risk. The value of a dollar will change compared to the value of the fund's base currency, which can affect returns. Additionally, investing in emerging markets may offer the potential for massive returns, but these countries often go through periods of upheaval and uncertainty, which can create risk for investments.

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International equities can provide exposure to a wider array of economic and market forces

US investors tend to be most familiar with US companies, but investing internationally can open up access to hundreds or even thousands of foreign securities. This can be achieved through an international mutual fund or ETF (exchange-traded fund).

International markets do not always rise and fall at the same time as the domestic market, so investing in both international and domestic securities can balance out some of the volatility in your portfolio. This can spread out your portfolio's risk more effectively than if you were only invested in domestic securities.

For example, while the US economy may be experiencing a downturn, other economies may be performing well. By investing in international equities, you can balance the declines of one nation or region with the gains of another.

Additionally, different countries are at different stages of economic development, and this can provide opportunities for investors. Developed markets, such as the UK, Japan, Australia, Canada, and France, tend to have established industries, widespread infrastructure, secure economies, and a high standard of living. On the other hand, emerging markets, such as India, China, Egypt, South Africa, Mexico, and Russia, are experiencing rapid growth and transitioning into developed markets.

Furthermore, international equities can provide exposure to foreign currencies, creating another layer of diversification. However, it is important to consider the risks associated with currency exposure, as the value of a dollar will fluctuate relative to the fund's base currency.

Overall, investing in international equities can provide access to a broader range of economic and market forces, potentially reducing risk and increasing returns.

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International equities can help investors benefit from the region or regions that are performing well at a particular time

For example, while the US economy may be in a downturn, other economies could be experiencing growth. By investing in international equities, investors can balance the declines of one nation or region with the gains of another. This strategy can help to reduce the impact of regional and country-specific economic downturns.

Additionally, international equities provide exposure to a wider array of economic and market forces across regions and nations. Different markets and economies can produce returns that vary from the US market, and this diversification of returns can benefit investors over time.

It's important to note that international equities also come with certain risks, such as currency exposure and political risk. However, a well-managed international equity fund can bring stability to an investment portfolio and help mitigate these risks.

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International equities can be a good investment option for those nearing retirement age

Firstly, international equities provide access to a wider array of economic and market forces across regions and nations. Different markets and economies can produce returns that vary from the US market, and by investing in international equities, you can benefit from the performing well regions at any given time. This diversification of returns can help offset underperforming areas and stabilize your portfolio.

Secondly, US equities are naturally most exposed to the economic forces of the US market. In contrast, international equities can provide exposure to other markets and reduce the impact of regional and country-specific economic downturns. This is especially important as you near retirement age, as you want to ensure your investments do not bottom out. Spreading your investments internationally can help manage risk and provide a more stable foundation for your portfolio.

Thirdly, international equities offer access to new growth opportunities outside the domestic market. While risk is inherent in any investment, international equities can lead to higher returns, especially in emerging markets. Investing in international equities allows you to capitalize on the growth and acceleration phases of other countries' economic cycles, which may be out of sync with the US economy.

Lastly, international equity funds create exposure to foreign currencies, adding another layer of diversification to your portfolio. However, it's important to remember that currency exposure works both ways and can positively or negatively impact your returns.

While there are benefits to investing in international equities, there are also some downsides and risks to consider. These include currency exposure, political risk, and lower liquidity compared to domestic investments. Nonetheless, for individuals nearing retirement age, international equities can be a valuable component of a well-diversified and risk-managed investment portfolio.

Frequently asked questions

International equities are stocks purchased outside of the United States market. International equity funds are the same as international mutual funds or international stock funds. The bottom line is that they consist of non-U.S. stocks.

The biggest benefit is diversification. Portfolio diversity is a common goal for investors. A diverse investment strategy, which spreads investments across numerous opportunities, significantly reduces the risk of failure and decline. International equities are an essential part of a diverse portfolio, and experts recommend investing about 30% (or more) in international markets.

One of the main risks is currency exposure. The value of a dollar will change compared to the value of the fund's base currency. When the dollar is strong, returns are reduced even in strong international stocks. Political risk is also a factor, especially in emerging markets.

Vanguard recommends that at least 20% of your overall portfolio should be invested in international stocks and bonds. However, for 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.

There are several types of international equity funds, including emerging market equities, sector-based international equities, country-specific international equities, and region-specific international equities.

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