Article Summary
- International stocks can behave differently than domestic stocks during certain market cycles, which is the core diversification argument for including them.
- Currency fluctuations add a layer of risk (and sometimes return) that purely domestic investing doesn't involve.
- International index funds make broad global diversification accessible without needing to pick individual foreign stocks.
"Diversification is protection against ignorance."
Warren Buffett
It's easy for a portfolio to become unintentionally concentrated in domestic stocks, especially for investors who only pay attention to companies and news they're personally familiar with — a bias sometimes called "home bias." International investing offers a way to diversify beyond that, spreading exposure across economies with different growth drivers, industries, and market cycles, though it comes with its own distinct considerations.
The Diversification Case for Going International
Different countries' stock markets don't always move in sync — a period of strong domestic returns can coincide with weaker international returns, or vice versa. Including international stocks is generally intended to smooth out some of this variability by not depending entirely on a single country's economic cycle.
Many investors have a natural "home bias," holding a larger share of domestic stocks than the country's actual share of the global economy would suggest, simply because domestic companies are more familiar — international investing is partly a deliberate correction for that bias.
Currency Risk (and Potential Reward)
When you invest in international stocks, your returns are affected not just by how the underlying companies perform, but also by how the foreign currency moves relative to your home currency. A strengthening foreign currency can boost returns for a domestic investor, while a weakening one can reduce them, independent of the company's actual business performance.
This currency effect adds a layer of complexity and volatility that purely domestic investing doesn't have, which is worth understanding rather than being surprised by when international holdings move differently than expected.
Developed vs. Emerging Markets
International investing generally spans both developed markets (like Europe, Japan, and other established economies) and emerging markets (like many countries in Asia, Latin America, and elsewhere with faster-growing but often more volatile economies). These two categories carry meaningfully different risk and return characteristics.
Emerging markets have historically shown higher volatility, along with different regulatory, political, and currency risks compared to developed markets, which is why many international funds are structured to distinguish between the two categories.
How Much International Exposure Makes Sense
There's no single universally agreed-upon allocation — recommendations vary among financial professionals, with some suggesting international exposure roughly proportional to global market capitalization, and others suggesting a smaller allocation given practical and risk considerations.
Broad international index funds make it straightforward to gain diversified exposure across many countries and companies without needing to research individual foreign stocks, which is generally the simplest entry point for most investors considering international allocation.