International Stocks: What to Know

As an investor, it’s important to build an asset allocation that works best for you. For many, this involves including domestic equities, along with other asset classes, in your portfolio. It’s also common to add international, or foreign, stocks alongside other securities to allow for more diversification and potential growth.

In this article, we’ll help you understand what international stocks are and what you should consider before investing. This includes how they differ from U.S. equities and what benefits and risks they may present. You’ll also learn their role in a portfolio and how to buy them.

What Are International Stocks?

International, or foreign market, stocks are shares of companies that you can purchase outside of the U.S. market. Like domestic equities, investors can choose options from several industries. However, unlike U.S. stocks, international ones rise and fall due to circumstances in their respective countries, making them a popular option for diversification.

Investors may either purchase shares of a public company or from an international stock fund. These are professionally managed portfolios that exclusively invest in foreign market equities. Whichever path you choose, there are several different types of equities to choose from, including:

• Emerging market funds. This refers to equities from developing nations. Because of this, there’s a higher potential for risk but also a chance for more substantial growth.
• Sector-based funds. Like domestic stocks, you can invest in options from specific industries, such as technology, energy, agriculture, or health.
• Region-specific funds. Some funds target specific regions worldwide, such as Asia or Europe. This allows you to diversify across a range of industries through a fund.
• Country-specific funds. Similarly, funds may also drill down to equities in a certain country. For instance, you may invest in a mutual fund that specifically holds securities from China.

Various factors influence international stock prices. Political conditions and economic policies in a country, for instance, can positively or negatively impact the value of your stake, much like in the U.S. Currency fluctuation is an additional possibility, which can also affect a stock’s value.

International vs. Domestic Stocks

International and domestic stocks are similar in that they allow you to buy and sell them for either a profit or loss, depending on a company’s success and the economic conditions of the country. However, foreign equities become much different due to their risks, market exposure, and regulatory environments. When you buy an international stock, its success is beholden to its corresponding country’s economic performance, such as currency fluctuation, as well as political and governmental conditions.

As a U.S. resident, it’s likely much easier for a person to grasp what’s going on in the country’s day-to-day that may influence the price of a company’s stock. However, if you invest in an international company, you may not have the information you need to make informed decisions. For instance, the outcome of an election or new economic policy could have a profound effect on the success of a stock.

Another difference to consider is the taxation of an international stock vs. one in the U.S. Some countries tax investors on realized capital gains. For this reason, it takes careful attention to tax rules to avoid double taxation and ensure you’re compliant.

Benefits and Risks of International Stocks

International stocks can be an effective way for a person to further diversify their portfolio and not be as reliant on the performance of U.S. equities. They also allow for growth potential when one invests in developing-market stocks. However, they can also present key risks to be aware of, such as volatile political conditions, currency fluctuations, and general changes in market value.

Below is a breakdown of the benefits and risks to consider before investing in international stocks:

Role of International Stocks in a Portfolio

International stocks are a popular option to diversify one’s portfolio. They can reduce your overall reliance on U.S. equities, which can subsequently help decrease risk.

With both the benefits and risks of international stocks in mind, how much of them should you add to your portfolio? Naturally, the answer to this question depends heavily on your preferences. Namely, your goals, risk tolerance, and time horizon will inform your decisions, along with the help of a professional.

In general, however, Vanguard recommends investing “at least 20% of your overall portfolio” in international stocks and bonds. The firm adds that to receive the full diversification benefits, you should invest “about 40% of your stock allocation” in foreign stocks.

Consider, though, that the above is simply a general recommendation from an advisory and brokerage firm. What’s best for you, as always, is dependent on your needs. For this reason, it’s crucial to get the expertise of a financial advisor before committing to any investment strategy.

How to Invest in International Stocks

You can typically buy international stocks or shares of foreign market mutual funds through a broker. These can be with a professional or an online platform, such as Vanguard or Fidelity. Additionally, you can buy these in a taxable investment account or through certain retirement accounts, such as a traditional or Roth IRA.

When adding international stocks to your portfolio, you have a few different options. The first and most direct option is to buy individual stocks from public companies. However, this can require significant time and effort to make the best decisions possible. The other option is to invest in an international stock mutual fund or exchange-traded fund (ETF). Examples include Vanguard Total International Stock ETF (VXUS) and iShares Core MSCI Emerging Markets ETF (IEMG).

Before including international stocks in your portfolio, we recommend consulting with a financial advisor or investment manager. A professional can help you select securities that make the most sense for your portfolio according to your goals, risk tolerance, and time horizon. A robo-advisor is also an option. These use automated strategies to invest on your behalf according to your preferences.

If you need help finding an advisor near you, consider using this free matching tool. After you fill out a brief quiz, it’ll pair you with a vetted professional who aligns with your needs.

Frequently Asked Questions

Are international stocks necessary?

International stocks aren’t necessarily a requirement to make positive progress in the market, but they do help diversify one’s portfolio. For this reason, it may be worth considering adding them, provided an advisor is also in favor of this approach for your needs.

Where can I buy international stocks?

You can buy international stocks through a brokerage platform, such as Vanguard, Fidelity, or Charles Schwab. They’re typically available through a taxable brokerage account, as well as tax-advantaged retirement accounts, such as traditional or Roth IRAs. Moreover, you’re also able to purchase shares of international stock ETFs or mutual funds, which invest in a wide variety of individual equities.

Are international stocks part of the three-fund portfolio?

Commonly, international stock funds are one of the securities people hold as part of the three-fund portfolio. They allow for exposure to equities other than those from the U.S. markets, increasing one’s diversification. For this reason, they’re a popular choice along with a domestic stock fund and a bond fund.

What is an international stock fund?

An international stock mutual fund or ETF is a professionally managed portfolio comprising non-U.S. equities. They typically focus on specific categories, such as emerging markets or developed equities. It’s also common for them to target certain regions or individual countries.

Because they’re professionally managed and include a diverse grouping of individual stocks, they can be a simpler and more efficient way to add international equities to your portfolio. However, we always recommend speaking with a financial advisor before you buy shares. It’s also important to read the prospectus of a fund to ensure you know how it’s run.