A fundamental reason to consider international investing is diversification. A big part of choosing your mix is to seek investments that are not perfectly correlated—that means including investments that provide the potential for gains in one part of your portfolio to offset poor performance in another. That’s true for asset classes—stocks, bonds, and cash—but also for countries and currencies. By diversifying, you may be able to achieve returns similar to those of a less-diversified portfolio, but with less risk, or you may be able to achieve greater returns, but with the same amount of risk. Keep in mind, though, that diversification cannot ensure a profit or protect against loss and that decisions about your investment strategy should be based on your personal goals, situation, and risk tolerance.
“You may want to be more conservative or aggressive based on your own situation, but regardless of where you fall on that spectrum, we think there are good reasons to consider making international stock investments part of your overall mix,” says Tim Cohen, chief investment officer at Fidelity. “A significant international investment exposure gives you access to other economies and opportunities, and may help to diversify your portfolio.”
Fidelity has assembled a range of diversified asset mixes that represent a range of risk levels, from aggressive to conservative. In these examples, the stock portion of the portfolios varies, but international stocks usually make up around 30% of the stock investments.
Why consider adding international stocks to your mix?
International investments have shown the ability to improve risk-adjusted returns. Since 1950, a globally balanced portfolio that included developed-market stocks has returned slightly more than the S&P 500, but with significantly less risk. The historical volatility of returns (as measured by standard deviation) for the global portfolio was almost 10% less. That’s why the Sharpe ratio—which measures risk-adjusted returns—has been so much higher for an internationally diversified portfolio.
|International diversification has improved risk-adjusted performance|
70% U.S./30% International
|Past performance is no guarantee of future results. It is not possible to invest directly in an index. All indices are unmanaged. Hypothetical “globally balanced portfolio” is rebalanced monthly in 70% U.S. equities, 25% developed-market (DM) equities, and 5% emerging-market (EM) equities. U.S. equities – S&P 500 Total Return Index; DM equities – MSCI EAFE Index, Morningstar, Global Financial Data (GFD) World x/USA Return Index; EM equities – MSCI EM Index, GFD Emerging Markets Index. Source: Bloomberg Finance L.P., Fidelity Investments (AART), as of June 30, 2015.|
The reason international investments have the potential to help improve the risk-adjusted performance of an investment portfolio is because, historically, international stock performance and U.S. stock performance have deviated from one another. That may be in part due to the unique risks of international investing, which include currency risk and political risk. But the outcome is that international investment may have the potential to help a portfolio overall.
A world of opportunities
Beyond diversification, there are some strong reasons to consider international markets based on the fundamental outlook for opportunities among these stocks.
Opportunities: Approximately 75% of the world’s publicly traded companies are found outside the U.S.2 That means a lot of opportunities exist beyond our borders. Sure, lots of U.S. companies get some of their revenues from abroad, but in an increasingly global economy, some industry-leading companies are located in foreign countries. To tap into those best-of-breed firms, you may have to look at international markets.
Growth: Most of the fastest growing economies in the world have been outside the U.S. In 2001, the U.S. accounted for 33% of global GDP, but by 2014 the U.S. represented just 22%.3 Other economies have grown more rapidly, helped in some cases by attractive demographics or less mature markets. While many U.S. corporations have significant presence in these overseas markets, foreign companies may have at least as much exposure to these rapidly growing economies as the U.S. does.
). “If you invest in the U.S. and exclude international, it’s sort of like investing in a U.S. fund that invests only west of the Mississippi. That would be needlessly narrowing your opportunity set—and I think the same argument can be made for excluding international.”
What it means for you
All decisions about what to invest in should start in the same place: your personal situation. Take a moment to use our Planning & Guidance Center to see how your personal financial situation, goals, and feelings about risk translate into an investment mix.
Then, review your current investments, and ask yourself whether your portfolio is global enough. If not, think about adding international mutual funds, individual stocks, or ETFs to bring you in line with your plan. Then revisit your strategy at least annually—or when you have a major change in your life.