International stocks: Exploring global investments
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While domestic stocks are often the preferred choice for many investors, international stocks provide a way to spread investments across different markets, countries, and sectors, all of which may not be directly correlated with US market performance. This diversification can potentially lead to higher returns while reducing overall risk.
Why add foreign equities to your portfolio?
Investing in international securities offers an appealing opportunity for investors seeking to diversify their portfolios, reduce risk, and access growth potential that may not be available within the US market.
Incorporating international stocks into an investment strategy is the primary reason for achieving better risk diversification. By expanding beyond the US market, investors can lower their exposure to domestic economic downturns and benefit from the performance of other global economies.
Another key reason is the potential for higher returns. Certain international markets, particularly emerging ones, often experience faster growth than developed economies.
This accelerated growth is driven by population expansion, industrialization, and urbanization. These markets may offer unique investment opportunities unavailable in more established economies, where growth tends to be steadier but less dramatic.
However, it’s important to note that investing in these emerging markets carries additional risks, including political instability, currency fluctuations, and regulatory changes. Countries such as China, India, and Mexico are prime examples of emerging markets that offer substantial growth potential and heightened risk levels.
Moreover, international stocks allow investors to participate in industries and sectors where the US market may have limited competition. For example, Asian markets are often at the forefront of technological advancements and manufacturing, while European companies excel in luxury goods, pharmaceuticals, and engineering sectors. By investing in these global leaders, investors can gain exposure to innovations and industries that are less prominent within the US market.
How have international funds performed recently?
The MSCI ACWI Ex US index tracks the foreign equity market in large and mid-developed countries, excluding the US. As of March 20th, 2025, the index is up 9.2% YTD, outperforming the S&P 500 quite significantly. However, the international index has lagged US indices over the last decade.
This shift is attributed to US market struggles amid tariff issues and recession fears, while international equities have benefited from factors such as Chinese economic stimulus.
Key considerations and risks:
- Currency Risk. One of the most significant risks associated with international investing is currency risk. When investing in stocks outside of your home country, fluctuations in exchange rates can impact the value of your returns. For example, if you’re investing in European stocks and the euro weakens against the US dollar, the currency translation could diminish your returns. To reduce currency risk, investments that hedge back to the US dollar are viable options.
- Geopolitical Risk. Political instability, economic crises, or social unrest can create significant risks for international investments. A country facing political upheaval or an economic downturn can see its stock plummet negatively affecting foreign investors. Looking for equities in more developed countries will lessen this risk.
- Regulatory Risk. Different countries have varying financial regulations, accounting standards, and disclosure requirements. In some countries, investor protections may not be as robust as those in the US or other developed economies. Investors must be aware of these differences to avoid unexpected surprises in their investment returns.
- Market Liquidity. Some international markets, especially in emerging economies, may not have the same liquidity as US markets. This could make buying or selling shares more difficult without significantly impacting the stock’s price. In less liquid markets, large institutional investors or funds might have a greater influence on prices, creating volatility.
Conclusion
International stocks offer investors a compelling opportunity to broaden their portfolios, diversify risk, and access markets with high growth potential. However, they also come with unique risks, from currency fluctuations and geopolitical instability to different regulatory environments. Before diving into international markets, it’s crucial to understand these risks and carefully consider your goals as an investor.
While international stocks may be on a tear right now in some regions, they require a thoughtful approach. By diversifying, investors can better position themselves to capitalize on global growth trends while managing risk. As with any investment, education and careful planning are crucial. Also, monitoring global economic conditions is essential to maximizing international stock opportunities.
Collin Knecht is an Investment Analyst at Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.BedelFinancial.com or email Collin at cknecht@bedelfinancial.com.