What is International Investing?
International investing means selecting global (non-U.S.) investment vehicles to include in your overall strategy to take advantage of a wider variety of investment opportunities and diversify your portfolio.1 For example, an investor may put money into international stocks, bonds, and mutual funds.1 To evaluate the global market, investors can look at what are called “all-country world indexes,” such as the FTSE (Financial Times Stock Exchange) Global All Cap Index and the Vanguard Total World Stock Index Fund.1 Also, MSCI (Morgan Stanley Capital International) is an international index provider that can be utilized.1 Some MSCI indexes are the MSCI All Country World Index, MSCI EAFE (Europe, Australasia, and Far East) Index, MSCI Emerging Markets Index, and MSCI Frontier Markets Index.1
There are two broad categories for non-U.S. stocks and bonds: developed and emerging markets.2 Developed markets include Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Singapore, South Korea, Spain, Sweden, Switzerland, and the United Kingdom.2 These are included under the developed category because they are considered to be bigger and more established, or less volatile than emerging markets.2 Emerging markets include markets like Brazil and Vietnam, and are considered to be more risky investments than their developed counterparts.2
Why International Investing?
Many individuals will choose to pursue international investments and investments with international exposure to diversify their portfolio and also to increase long-term capital growth.4 Since international economies may move differently than that of the United States, international investments can have less volatility.4 In the past, data has shown adding 10% in international assets to a U.S.-based investment portfolio can lower the standard deviation of the portfolio overall to 0.7-1.1% in a five-year timespan.2 As standard deviation is used as a measure of risk for investment portfolios, that reduction can be significant in increasing returns over time.2
What are the Risks?
Some of the largest risks international investors face are currency exchange volatility, higher transaction costs, and reduced liquidity.
• Currency exchange volatility – Also known as foreign exchange risk, currency exchange volatility is a big risk that international investors face.1 When the exchange rate on a foreign currency and the U.S. dollar goes up or down, the real return on an international investment can change.4
• Higher transaction costs – There can be more costs associated with international investing.3 Beyond higher commission charges, international investors can be faced with additional charges such as clearing fees, exchange fees, levies, stamp duties, and taxes.3
• Reduced liquidity – This is a risk especially prevalent with investments in emerging markets.3 Liquidity risk means it may take more time between the sell order and when the investment can actually be sold, making the investment overall less liquid.3
For more information on international investing risks and benefits, check out the U.S. Securities and Exchange Commission’s page on International Investing here.
Is International Investing Still a Prudent Diversification Option?
Diversification and risk reduction comes from investing in assets with low-correlation.2 In the case of international investing, non-U.S. assets are generally seen as having a lower level of correlation with U.S. assets.2 Therefore, we would assume that in many cases, the overall portfolio volatility would be decreased.2 However, in some cases this does not hold true.2 The correlation between non-U.S. assets and U.S. assets has strengthened in the short term, which may be a sign of decreased diversification over time.2 Despite this short-term deviation, it is still widely believed that international investing is a suitable way to provide diversification and manage risk in a U.S.-based portfolio.2
To discuss whether international investing is a good choice for your portfolio, schedule an appointment or reach out to our office at 772-888-3757.
1. International Investing: https://www.investopedia.com/terms/i/international-investing.asp
2. Does International Investing Really Offer Diversification?: https://www.investopedia.com/articles/financial-theory/09/international-investing-diversification.asp
3. The 3 Biggest Risks Faced by International Investors: https://www.investopedia.com/articles/basics/11/biggest-risks-international-investing.asp
4. International Investing: https://www.sec.gov/reportspubs/investor-publications/investorpubsininvesthtm.html