Do I really need international stocks in my portfolio?
In general, 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.
Should I Invest in International Stocks? While they won't outperform in every market, international stocks have produced solid returns over time. They can also provide diversification benefits (especially as a hedge against weakness in the U.S. dollar) and exposure to leading companies outside the United States.
Start by allocating 15% to 20% of your equity portfolio to foreign stocks. That's the percentage I typically maintain in the Vanguard portfolios. It's meaningful enough to make a difference in your overall returns, but not so much that it will ruin your portfolio when foreign markets temporarily fall out of favor.
Key Takeaways. Home-country bias leads investors to favor domestic securities despite potential global opportunities. U.S. stocks accounted for 44.9% of the global equity market capitalization in 2023. International stocks offer diversification, exposure to global growth and industry representation.
"Adding international stocks to your portfolio can dampen volatility and improve returns, since the U.S. economy and market may face challenges at different times compared to international regions," says Scott Klimo, chief investment officer at Saturna Capital.
Anywhere between 30% to 50% in international is reasonable. The current market cap weight would be roughly 60/40 but of course that fluctuates.
Think long term. 2024 may be a good time to look for bargains in international stocks that have the long-term potential to deliver higher returns than US stocks. Fidelity's Asset Allocation Research Team (AART) forecasts that international stocks will outperform US stocks over the next 20 years.
Second, worldwide diversification allows the stock-bond ratio of a portfolio to be increased without raising the overall risk of the portfolio because returns between the broad US and International markets are not perfectly correlated.
How much international equity should you own? We suggest an equity allocation of 70% U.S. and 30% international.
Foreign markets can be more volatile than U.S. markets due to increased risks of adverse issuer, political, market or economic developments, all of which are magnified in emerging markets. Foreign securities are subject to special risks, including currency fluctuation and political and economic instability.
What is a good international stock to buy?
| Company Name | Ticker | Sector |
|---|---|---|
| InterContinental Hotels Group | IHG | Consumer Cyclical |
| Yum China Holdings | YUMC | Consumer Cyclical |
| Ambev | ABEV | Consumer Defensive |
| Anheuser-Busch InBev SA/NV | BUD | Consumer Defensive |
US equities have dominated international equities over the past decade, but in the decade before that, it was international equities that were on a hot streak. The MSCI EAFE Index, which includes companies in emerging and developed markets, outperformed the S&P 500 Index seven times between 2000 and 2009.
Diversification can help you protect against risk.
Over-allocating to a single stock market exposes you to increased risk. Tapping into international economies and markets that aren't in lockstep with the US can help you to enhance your portfolio's risk-adjusted return potential.
A general rule of thumb is that cash and cash equivalents should comprise between 2% and 10% of your portfolio.
Short-term volatility: while the S&P 500 historically provides strong annual returns over the long term, it's not immune to market volatility. Investors must be able to stomach short-term price swings and even sustained periods of market downturn like a bear market.
It's a good idea to review your portfolio on a quarterly or annual basis. This reassessment may not lead to any activity, but at least you'll know you're on track.
International vs. US stocks aren't an either/or decision, but rather a both/and situation. For the best risk/reward tradeoff, a mix of about 60-70% US and 30-40% international has historically been a good combination.
The common rule of asset allocation by age is that you should hold a percentage of stocks that is equal to 100 minus your age. So if you're 40, you should hold 60% of your portfolio in stocks. Since life expectancy is growing, changing that rule to 110 minus your age or 120 minus your age may be more appropriate.
The research by three U.S. finance professors led by University of Arizona professor Scott Cederberg comes to the surprising conclusion that a portfolio holding 100% stocks and no bonds is best, even for people already in retirement.
Or is a strong dollar good? While a strong dollar may hurt US stocks, it also makes international stocks a bargain for US investors who want to diversify their portfolios.
How often do international stocks outperform US stocks?
Despite lagging in recent years, when you look historically: in the last 50 years, international stocks outperformed U.S. stocks in over 40% of all 10-year rolling time periods.
In conclusion, while U.S. stocks may seem overvalued on the surface, a deeper analysis shows that this is driven only by a handful of companies whose valuation collectively may not be unreasonable.
Investing internationally provides diversification and potential for growth, especially in emerging markets, but it comes with a set of risks. Among them, the main ones are the higher costs, the changes and fluctuations in currency exchange rates, and the different levels of liquidity in markets outside the U.S.
Using a large sample of stocks from 48 developed and emerging markets over 1995 to 2021, we find evidence that suggests that international diversification is the best risk-reduction tool when all markets are considered.
Diversification reduces risk by investing in vehicles that span different financial instruments, industries, and other categories. Unsystematic risk can be mitigated through diversification, while systematic or market risk is generally unavoidable.
