It's a big world out there — investment mixes may benefit from some global flavor.
America is home to some of the greatest companies in the world, but there are also many great companies outside the country's borders. In fact, nearly three-quarters of the world's companies are headquartered outside the US, and international investments represent 46% of global market capitalization. You may be missing out on some benefits if you choose only US investments. Consider these 3 arguments that make the case for investing internationally.
1. Domestic stocks do not always outperform international equities
Stocks of companies based in the US have been on a tear in recent years—but that is not always the case. Historical performance over the past 4 decades shows that domestic and international stocks have moved in a cycle of alternating outperformance. While past performance is no guarantee of future performance, this suggests that the cycle will swing back toward international stocks at some point. For example, international stocks beat US stocks by a wide margin between 2003 and 2009. Since then, US stocks have outperformed international stocks—in one of the longest winning streaks for US stocks since 1979. By investing in international stock, your portfolio is positioned to take advantage of the potential periods of international outperformance.
2. Your international exposure may have fallen
Fidelity's analysis of retail account data has shown that, for many investors, the proportion of international relative to domestic stocks has slipped in recent years. Investors under the age of 35 have the least exposure of any age group.*
Since 2009, the level of international stocks held by households under age 35 has fallen by 8 percentage points. For households between the ages of 35 and 50, it's fallen by 3 percentage points.
3. Now may be a good time to ensure that you are globally diversified
Stocks in the US have had a good run in recent years, thanks to strong earnings growth and rising valuations. If you haven't rebalanced, that may have decreased the percentage of your portfolio devoted to international stocks. That may make it a good time to rebalance.
The difference between emerging and developed market stocks
Some countries are very similar to the US in terms of perceived political stability, regulatory regimes, and trade. Developed-market countries are widely industrialized, have established economies, and enjoy a stable and robust infrastructure. Examples include England, France, Germany, and Japan.
Markets in other countries that are not as developed are generally referred to as emerging markets. They are characterized by rapid growth and industrialization, the emergence of industries and regulation, and a growing middle class. Examples include Brazil, China, India, and Russia.
Investing in international developed-market companies comes with some risks you might not run into with US companies—including interest-rate, currency, and political risks. Stocks from emerging market countries may come with similar—and in some cases, amplified—risks. Some investors reduce exposure to these risks by allocating only a small percentage of their portfolio to emerging-market stocks, relative to developed-market stocks.
How much international?
Like all investment choices, the amount of international stocks in your mix should be based on your investment time frame, financial needs, and tolerance for risk. There may be some diversification benefits to including international equities in your investment mix. Over a very long period of time, adding international investments to your mix could improve risk-adjusted returns. That means that your investment mix could experience less volatility with higher returns than would otherwise be shown at that lower level of risk.
Historically, a globally balanced portfolio consisting of 70% US and 30% international equities has provided competitive absolute returns, lower volatility, and better risk-adjusted returns than an equity portfolio consisting of just US stocks.
Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.
*Based on a Fidelity analysis of personal investing account data as of March 1, 2017. Domestic equity was measured as all domestic equity mutual funds and ETFs as per Morningstar and international equity was all international equity mutual funds and ETFs per Morningstar.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
Foreign markets can be more volatile than U.S. markets due to increased risks of adverse issuer, political, market, or economic developments, all of which are magnified in emerging markets. These risks are particularly significant for investments that focus on a single country or region. Indexes are unmanaged. It is not possible to invest directly in an index.
The S&P 500® Index is a market capitalization?weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent US equity performance. S&P 500 is a registered service mark of The McGraw-Hill Companies, Inc., and has been licensed for use by Fidelity Distributors Corporation and its affiliates.
Dow Jones US Total Stock Market is designed to track the broad equity market, including large, mid-, small-, and micro-cap stocks.
MSCI ACWI Ex USA captures large- and mid-cap representation across 22 of 23 developed markets (DM) countries (excluding the US) and 23 Emerging Markets (EM) countries.
MSCI Europe, Australasia, Far East Index (EAFE) is a market capitalization?weighted index that is designed to measure the investable equity market performance for global investors in developed markets, excluding the US and Canada.
MSCI Emerging Markets (EM) Index is a market capitalization weighted index designed to measure the investable equity market performance for global investors in emerging markets.