Talk to any financial advisor, read any financial advice book, or watch any financial guru on television, and you’ll hear the same word chanted over and over – “Diversify!” You may think that diversifying your investments means just making sure to put some of your money into stocks, bonds, and cash, but there’s a greater step that you can take. Within your stock holdings, it might be time to consider diversifying your investments outside of the United States and into international stocks and mutual funds. Risky? A little, but the gains can also be very tantalizing.
The Case for Investing Internationally
The United States is a solid bet as far as stocks go. Over the very long term, U.S. stock indexes have always gone up. However, by investing only in U.S. companies, you could be boxing yourself in, increasing your risk, and lowering your overall grains.
As we saw with the Great Recession of 2008, U.S. stocks can tumble hard. If you have all of your stocks in U.S. companies, you could be at risk if we go through another recession or backslide. The whole point of diversification is to help insulate yourself against major swings in one portion of your portfolio.
The United States is dependable as far as investments go (which is a good thing), but it isn’t always a red-hot superstar. In 2018, the U.S. economy grew about 3% while India grew about 7% that same year. International stocks can grow fast (and also fall fast, as we’ll look at later). By putting a portion of your stock investment into international funds, you can enjoy the potential for spectacular growth…as long as you’re willing to take the risk.
The Risks of International Stocks
There’s a flip side to the high-powered growth potential of international stocks. They also carry greater risk. This is definitely something to consider when thinking of investing in international stocks.
Political and Social Upheaval
As Venezuela has shown, many countries around the world are vulnerable to massive upheaval. For years, Venezuela boasted huge growth only to crater as a result of poor political management and the steep drop in oil prices, the country’s only major resource. All across the world, company growth and profits are at the mercy of a new political party coming into power, new laws passing, or social upheaval.
Currency valuations are constantly changing, and even if one of your international stocks is doing well, your profits could plummet if that country’s currency suddenly tanks against the U.S. dollar.
How Much Should You Invest in International Stocks?
International stocks should only be a portion of a much larger, diversified investment or retirement portfolio. The amount you invest will depend greatly on your personal appetite for risk and your investment goals. For example, a 25-year-old saving for retirement can handle a lot more volatility, because her savings have 40 years to grow. She could invest a lot more of her retirement in international funds than, say a 55-year-old who may not have the time to recover from larger drops.
When looking into international stocks, consider investing in international mutual funds. These funds can spread the risk across a variety of international companies and countries. You’ll also be able to choose international mutual funds that focus on lower-risk and higher-risk investments, as well as country-specific and industry-specific international mutual funds.
We encourage you to work with a financial planner to develop an investment and retirement strategy that is right for you. We also suggest that you continue your financial education and develop good money habits with the help of a Money Club. Start one with your friends in your community!