Investing isn't, and shouldn't be, limited to just the U.S. If you look around, there are countless great companies worth investing in. The variety of global regions, market maturity, and growth potential are all reasons why investors shouldn't limit themselves to just U.S. companies. As an investor, you want to give yourself the best chance to receive a good return on your investment, and you can push yourself closer to accomplishing this by looking outside of the U.S.
Here are three reasons you need international stocks in your portfolio.
1. Added diversification
One of the key pillars of a good investment portfolio is diversification; you never want all your eggs in one basket. Part of having diversification includes investing in companies with different market caps, different industries, different growth potential, as well as different geographic locations around the world. If you only invest in U.S. companies, you're limiting yourself and missing out on quality investments that could provide sizable returns.
Researching single companies to invest in can already be a time-consuming task for most people, and adding in the international element doesn't make it much better. Instead of going through that, you should consider investing in an international ETF, which can provide double the diversification by giving you exposure to companies across many regions. Take the Vanguard Total International Stock ETF (NASDAQ: VXUS), for example. This ETF holds 7,881 companies in the following regions:
Emerging markets: 25.2%
North America: 8%
Middle East: 0.5%
One investment into an ETF like that can ensure you're not reliant on a particular international region to do the heavy lifting.
2. Some markets are a chance for high growth
International markets are generally divided into two categories: developed and emerging. Developed markets are typically those with advanced economies, better infrastructure, established industries, and higher living standards. Examples of developed markets include the U.S., Canada, the U.K., Japan, and Australia. On the other hand, emerging markets typically have lower incomes, younger capital markets, and less stable economies. Examples of emerging markets include “BRIC” countries (Brazil, Russia, India, and China) as well as Mexico and Spain.
Although emerging markets have less developed economies, they're seen as progressing toward becoming developed and experiencing rapid economic and infrastructural growth. Although a bit riskier because of economic, and often political, uncertainties, investing in emerging markets can be rewarding because of the higher growth potential. It may be scary to invest in companies in places you're unfamiliar with, but there are risks with any investment; investing in ETFs instead of single companies can hedge some of the risks while also giving you exposure to the growth potential.
3. Different currencies can have an added benefit
When you invest in companies in different countries, you're also essentially investing in their respective currency. For example, if you purchase stocks on the London Stock Exchange, the value of those investments can fluctuate along with the British pound. Although this can go either way — whether rising or falling — it's also a chance to get diversification in currencies and hedge against potential declines in the U.S. dollar. If the U.S. dollar falls, having international exposure helps to neutralize currency swings.
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Stefon Walters has 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.