Why You Should Own International Stocks (Not Just US)

Imagine putting all your eggs in one basket – what happens if that basket falls? The same idea applies to your investments. If all your money is tied up in companies from just one country, you're missing out on incredible opportunities around the world and taking on more risk than you need to. Let's explore why looking beyond your home country is a smart move for any new investor.

What Are Stocks, and Why Invest Internationally?

First things first, let's quickly define what we're talking about. A stock represents a tiny piece of ownership in a company. When you buy a stock, you become a part-owner, and if the company does well, the value of your stock can increase.

Most new investors in the United States naturally think about investing in US companies like Apple or Amazon. And those are great companies! However, the world is a big place, and many fantastic companies that create innovative products and services are located outside the US.

International stocks are simply stocks of companies that are based outside of your home country. For someone living in the US, this would include companies in places like Europe, Asia, Latin America, and other regions.

So, why bother with international stocks? There are two main reasons:

1. More Growth Opportunities: The US economy is strong, but it's not the only place where companies are growing rapidly. Other countries, especially developing ones, can experience periods of explosive economic growth. By investing internationally, you open yourself up to these additional growth engines.
2. Reduced Risk (Diversification): This is perhaps the most important reason. Imagine the US economy goes through a tough patch. If all your investments are in US companies, your entire portfolio could suffer. But if you also own stocks in companies from other countries, those international investments might be doing well, helping to balance out the downturn in the US. This strategy of spreading your investments across different areas to reduce overall risk is called diversification.

The Power of Diversification: Don't Put All Your Eggs in One Basket

Diversification is a core principle of smart investing. Think of it like a sports team. A team with only star pitchers might dominate some games, but what happens if their pitchers have an off day or get injured? A well-rounded team with strong batters, fielders, and pitchers is much more likely to win consistently over time.

In investing, diversifying means not only investing in different types of companies (like tech, healthcare, energy) but also in companies from different parts of the world. Different countries and regions often perform differently at different times.

For example, sometimes US stocks perform better than international stocks, and sometimes the opposite is true. If you only invest in US stocks, you might miss out on periods when international markets are leading the way.

Concrete Example: Let's look at a simplified example over a few years:

• Year 1: US Stocks grow by 10%, International Stocks grow by 20%.
• Year 2: US Stocks grow by 15%, International Stocks grow by 5%.
• Year 3: US Stocks grow by 5%, International Stocks grow by 18%.

If you only invested $1,000 in US stocks, after three years you'd have approximately $1,000 * 1.10 * 1.15 * 1.05 = $1,328.*

If you only invested $1,000 in International stocks, after three years you'd have approximately $1,000 * 1.20 * 1.05 * 1.18 = $1,487.*

Now, what if you diversified and invested $500 in US stocks and $500 in International stocks?

• US portion: $500 * 1.10 * 1.15 * 1.05 = $664
• International portion: $500 * 1.20 * 1.05 * 1.18 = $743.50
• Total: $664 + $743.50 = $1,407.50

In this example, the diversified portfolio didn't get the absolute highest return (the all-international portfolio did), but it provided a strong, balanced return. More importantly, it protected you from putting all your eggs in one basket, which can be crucial during unexpected economic shifts. Over the long term, this balancing act can lead to more consistent and potentially higher returns with less overall stress.

How to Easily Add International Exposure to Your Portfolio

The good news is that you don't need to be an expert in global economics to invest internationally. You don't have to research individual companies in Japan or Germany. For beginners, the easiest and most recommended way to get international exposure is through Exchange Traded Funds (ETFs) or Mutual Funds.

An ETF (Exchange Traded Fund) is a type of investment fund that holds a collection of many different stocks (or other investments). When you buy one share of an international stock ETF, you are essentially buying a tiny piece of hundreds or even thousands of international companies all at once. This gives you instant diversification across many companies and countries.

A Mutual Fund is similar to an ETF in that it pools money from many investors to buy a diversified portfolio of stocks. The main difference for beginners is how they are bought and sold (ETFs trade like stocks throughout the day, while mutual funds are priced once a day). Both are excellent tools for diversification.

You can find ETFs and mutual funds that focus specifically on international stocks. These funds are often labeled with terms like:

• "International Stock Fund"
• "Developed Markets Fund" (focuses on economically advanced countries like Japan, UK, Germany)
• "Emerging Markets Fund" (focuses on rapidly developing economies like China, India, Brazil)
• "Total World Stock Fund" (combines US and international stocks into one fund)

When you choose one of these funds, you're instantly diversified across many international companies without having to pick individual stocks yourself.

How Much International Exposure Do You Need?

There's no single "perfect" percentage, but many financial experts recommend having a significant portion of your stock investments in international markets. A common guideline for a diversified portfolio might be to have anywhere from 20% to 40% (or even 50%) of your stock investments in international companies.

For example, if you decide to allocate 30% of your stock portfolio to international investments, and you have $1,000 to invest in stocks, you would put $700 into US-focused stock funds and $300 into international stock funds.

The exact percentage can depend on your personal comfort level and long-term goals, but the key is to have some international exposure rather than none at all.

Key Takeaways

• Diversification is crucial: Investing in international stocks helps spread your risk and reduces your reliance on any single country's economy.
• Unlock more growth opportunities: Many fast-growing companies and economies are located outside the US.
• Easy to implement: You don't need to pick individual international stocks; ETFs and Mutual Funds offer simple, diversified exposure.
• Aim for balance: Many experts suggest allocating 20% to 40% (or more) of your stock investments to international markets.

Embracing international stocks might seem like an extra step, but it's a powerful way to build a more robust and resilient investment portfolio. By looking beyond your own borders, you're not just investing in companies; you're investing in a world of opportunity. You've got this!