When is it reasonable to put money into a sluggish investment? International markets have struggled even more than the US stock market in 2022. This year, the Vanguard Total International Stock Index Fund, which has investments in about 8,000 companies worldwide, is down about 25%. It’s understandable why foreign assets are currently struggling. This is attributed to the looming European recession, the ongoing war in Ukraine, the substantial losses in China’s stock market, and the enduring consequences of the pandemic on the global supply chain. However, it is not limited to this year. BlackRock data show that US stocks have outperformed their foreign counterparts in eight of the last nine years. Irrespective of the disappointing returns, investing abroad is likely to be a sound strategy. What’s the reason? Diversification refers to the investment strategy of owning various assets — stocks and bonds — to avoid being unduly exposed to any particular one. The strategy also includes purchasing stakes in companies of multiple sizes (think of large and small enterprises), industries (such as consumer staples and technology), and countries. As a result, if one of those assets underperforms, the rest of your portfolio should keep steady or improve. Callie Cox, a financial analyst at the eToro trading platform in the United States, argues that each investor’s portfolio should be as unique as they are. Diversification is essential. International stocks outperform US stocks when the S& P 500 performs poorly. They tend to underperform when the S&P 500 is performing well, according to chartered financial analyst Eric Nelson of Servo Wealth in a blog post last year. Nelson wrote, “That is what you would expect.” “It’s the essence of differentiation.” According to BlackRock, despite their recent lag, the global stock market outperformed the US stock market 100% when US returns were less than 4% between 1971 and 2021. International stocks outperformed US stocks 94% of the time when US returns were less than 6%. In other words, if your local portfolio declines, international stocks may increase. The opposite is true, and this is what diversity is all about. There’s also the possibility of underperforming international companies being a fantastic investment opportunity. Experts agree that US stocks will not always outperform their global counterparts. Investors can be forgiven for questioning if the 14-year US outperformance will continue indefinitely. International Stock Market Dangers Naturally, there are risks connected with international stocks. They are more likely to be affected by currency swings and political upheavals, like the current conflict in Ukraine. International assets are taxed differently depending on their origin and may be subject to different laws. Not to mention that the international and US stock markets are beginning to track each other more closely, reducing the benefits of international companies as diversifiers. While the benefits of buying international equities “aren’t as appealing as they previously were, the overall benefits of diversity remain. How to Invest in Foreign Stocks Vanguard recommends devoting at least 20% of your total portfolio to international stocks and bonds. However, Cox notes that this allocation should also consider your age, risk tolerance, and other investments. And don’t bother about figuring out how to buy equities in euros or yuan. Investing in international assets is simple with a mutual or exchange-traded fund (ETF). There are many different types of international funds. For instance, funds that focus on a single country, funds that focus on emerging markets like China and Brazil, and funds that focus on a certain region like Asia-Pacific, Europe, or Latin America. You might already be invested if you have a 401(k). Many target-date funds, popular 401(k) investments, already include foreign exposure. You can also purchase them directly through overseas stock exchanges or American Depository Receipts that trade on US platforms. But be cautious: buying individual foreign equities will not provide you with wide exposure to overseas markets like holding a mutual fund or ETF will. Even if you don’t think you hold any international stocks or don’t want to, there’s a strong possibility you do. “If you’re a US investor in some of the largest mutual funds and ETFs available, you’re inherently a global investor,” Cox adds. The largest companies in such funds (think Apple or Procter & Gamble) “receive a significant amount of their income from overseas,” she says.
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