Stocks

Stocks

You may not be as familiar with the names of companies outside the United States, which might make you feel like the stocks and bonds they issue are risky.

But if you invest in an international mutual fund or ETF (exchange-traded fund), you’re increasing your portfolio’s diversification by getting access to hundreds—sometimes thousands—of foreign securities.

Markets outside the United States don’t always rise and fall at the same time as the domestic market, so owning pieces of both international and domestic securities can level out some of the volatility in your portfolio. This can spread out your portfolio’s risk more than if you owned just domestic securities.

How much should be invested internationally?

For most people, investing internationally through mutual funds or ETFs is the easiest option. Not only do you get the benefits of diversification, but investing through funds is also generally cheaper and easier since you don’t have to worry about the costs and timing considerations involved in trading on international exchanges or through.

Things to consider

Investments in international markets are exposed to an additional source of volatility: currency fluctuations. This is especially true for international bonds. To dampen that volatility, consider international investments hedged in U.S. dollars.

Types of international markets

International markets are generally divided into 2 categories:

  • Developed markets are located in countries that have established industries, widespread infrastructure, secure economies, and a relatively high standard of living.
    Examples of developed markets include the United Kingdom, Japan, Australia, Canada, and France.
  • Emerging markets are located in countries that have developing capital markets and less-stable economies. However, they’re considered to be in the process of transitioning into developed markets, and they may be experiencing rapid growth. Currently, emerging markets make up about 15% to 20% of international markets in total.
    Examples of emerging markets include India, China, Egypt, South Africa, Mexico, and Russia.

Not surprisingly, developed markets are similar to the United States when it comes to volatility levels and the range of potential returns.

International regions
  • Asia-Pacific (Australia, Japan, Hong Kong, Singapore).
  • Europe (United Kingdom, France, Spain, Germany).
  • Latin America (Brazil, Mexico, Argentina, Peru).
How to choose an international investment

There are a few ways you can invest in foreign markets:

  • International funds invest only in foreign markets, excluding the United States.
  • Global or world funds provide exposure to both foreign and U.S. markets.
  • Regional funds invest primarily in a specific part of the world, like Europe or the Pacific region.
  • Developed markets funds focus on foreign countries with proven economies, like Japan, France, or the United Kingdom.
  • Emerging markets funds combine investments in countries that are considered to have “developing” economies, like India, Brazil, or China.

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