Investors are often drawn to the allure of international stocks, especially when U.S. markets are experiencing periods of volatility or when domestic equities seem overvalued. The appeal lies in the diversification benefits they offer, potentially enhancing overall portfolio returns while reducing risk. But is now a good time to invest internationally?
Recent market dynamics have seen U.S. large growth stocks, particularly in the technology and communications sectors, outperforming other asset classes. This dominance has led some investors to question whether they should look beyond U.S. borders for investment opportunities.
Alex Michalka, vice president of investment research at Wealthfront, highlights an interesting trend: U.S. stocks have been the top-performing asset class for only three out of the last 10 years. In 2023, foreign stocks emerged as the second-best-performing asset class, indicating the importance of diversification across different markets.
One factor contributing to the appeal of international stocks is the phenomenon of “home-country bias” among investors. This bias refers to the tendency for individuals to favor domestic securities over foreign ones due to familiarity and perceived lower risk. However, allocating a portion of one’s portfolio to international stocks can help mitigate this bias and provide exposure to a broader range of industries and regions.
International stocks offer several advantages, including exposure to global economic growth, diversification across different markets, and access to industries that may be underrepresented in domestic markets. For example, U.S. multinational companies tend to dominate certain sectors like technology and healthcare, whereas international stocks can offer exposure to industries such as basic materials and emerging markets.
Financial planners often recommend allocating a portion of a portfolio to international investments, typically around 20%. This allocation can be split between developed and emerging markets based on an investor’s goals and risk tolerance. Diversifying internationally can help protect against domestic market volatility and geopolitical risks.
Despite the potential benefits of international diversification, some investors remain skeptical. They argue that U.S. companies already have significant exposure to global markets, with many generating a substantial portion of their revenue from overseas operations. Additionally, the correlation between U.S. and international stock markets has been increasing, reducing the diversification benefits traditionally associated with investing internationally.
In conclusion, while international stocks can offer diversification benefits and exposure to different market opportunities, investors should carefully consider their investment objectives and risk tolerance before making any decisions. As with any investment strategy, thorough research and consultation with a financial advisor are essential to construct a well-diversified portfolio that aligns with one’s long-term goals.