Investing is not and should not be limited to the United States alone. If you look around, there are countless great companies to invest in. The variety of global regions, market maturity and growth potential are all reasons why investors shouldn’t limit themselves to just US companies. As an investor, you want to give yourself the best chance of receiving a good return on your investment, and you can get closer to that goal by looking outside of the United States.
Here are three reasons why you need international stocks in your portfolio.
1. Increased diversification
One of the pillars of a good investment portfolio is diversification; you never want all your eggs in one basket. Part of diversification is investing in companies with different market capitalizations, different industries, different growth potential, as well as different geographic locations around the world. If you only invest in US companies, you are limiting yourself and missing out on quality investments that could generate significant returns.
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Finding unique companies to invest in can already be a daunting task for most people, and adding the international element doesn’t make it much better. Instead, you should consider investing in an international ETF, which can double the diversification by giving you exposure to companies from many regions. Take the Vanguard Total International Stock ETF (NASDAQ: VXUS), for example. This ETF holds 7,881 companies in the following regions:
- Europe: 39.5%
- Pacific: 26.8%
- Emerging markets: 25.2%
- North America: 8%
- Middle East: 0.5%
An investment in an ETF like this can ensure that you are not dependent on a particular international region to do the heavy lifting.
2. Some markets are driving strong growth
International markets are generally divided into two categories: developed and emerging. Developed markets are generally those with advanced economies, better infrastructure, established industries and higher standard of living. The United States, Canada, United Kingdom, Japan and Australia are examples of developed markets. On the other hand, emerging markets generally have lower incomes, younger capital markets and less stable economies. Examples of emerging markets include the “BRIC” countries (Brazil, Russia, India and China) as well as Mexico and Spain.
Although emerging markets have less developed economies, they are seen as progressing towards development and experiencing rapid economic and infrastructural growth. Although a bit more risky due to economic and often political uncertainties, investing in emerging markets can be rewarding due to the higher growth potential. It can be scary to invest in companies located in places you don’t know, but all investing involves risk. investing in ETFs rather than individual companies can hedge some of the risk while exposing you to the potential for growth.
3. Different currencies can have an added advantage
When you invest in companies from different countries, you are also essentially investing in their respective currencies. For example, if you buy shares on the London Stock Exchange, the value of those investments may fluctuate with the British pound. While it can go either way – up or down – it’s also a chance to gain currency diversification and protect against potential declines in the US Dollar. If the US dollar falls, having international exposure helps neutralize currency fluctuations.
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Stefon Walters holds positions in Vanguard Total International Stock ETF. The Motley Fool has positions in and recommends Vanguard Total International Stock ETF. The Motley Fool has a disclosure policy.