US Equities Education Series

Global vs US Stocks: Understanding International Investing

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This is article 8 in our series

For many investors, the U.S. stock market serves as their primary investment venue. However, limiting investments to just one country – even if it's the world's largest economy – means potentially missing out on significant opportunities. This article explores the key differences between U.S. and global stocks, helping you make informed decisions about geographic diversification in your investment portfolio.

Understanding Global Markets

The U.S. stock market, while substantial, represents less than half of the world's total stock market value. Major markets outside the United States include:

  • European Union: Home to multinational giants like LVMH, Nestlé, and SAP
  • Japan: Features global leaders in technology and manufacturing like Toyota and Sony
  • China: Hosts rapidly growing companies like Tencent and Alibaba
  • United Kingdom: Home to established firms like HSBC and Unilever

Why Consider Global Stocks?

Diversification Benefits

Geographic diversification can help reduce portfolio risk. Different economies often move in different cycles, meaning that when one market is struggling, another might be thriving. For example, during the 2008 financial crisis, while U.S. markets declined sharply, some emerging markets showed greater resilience.

Growth Opportunities

Many of the world's fastest-growing economies are outside the United States. While these markets often carry higher risks, they also offer potential for higher returns. Consider that:

  • Emerging markets often have younger populations and rapidly growing middle classes
  • Many international markets are in earlier stages of development, offering ground-floor opportunities
  • Some industries are dominated by non-U.S. companies (e.g., European luxury goods, Japanese robotics)

Currency Exposure

Investing in international stocks provides exposure to foreign currencies. When the U.S. dollar weakens, returns from international investments can be amplified when converted back to dollars. However, the reverse is also true – a strengthening dollar can reduce returns from international investments.

Key Differences Between U.S. and Global Stocks

Market Structure

The U.S. market is known for its:

  • Strong regulatory framework
  • High liquidity
  • Sophisticated market infrastructure
  • Extensive analyst coverage
  • Stringent reporting requirements

International markets vary significantly:

  • Developed markets like Japan and Germany have robust structures similar to the U.S.
  • Emerging markets may have less regulatory oversight and different accounting standards
  • Some markets have restricted access or special requirements for foreign investors

Corporate Governance

Different regions have varying approaches to corporate governance:

  • U.S. companies typically prioritize shareholder interests
  • European companies often balance shareholder needs with worker considerations
  • Japanese firms traditionally focus on stakeholder relationships and long-term stability
  • Family-controlled businesses are more common in emerging markets

Trading Considerations

When investing globally, consider:

  1. Trading Hours: International markets operate in different time zones
  2. Settlement Procedures: May vary by country
  3. Trading Costs: Often higher for international trades
  4. Tax Implications: More complex with international investments
  5. Currency Exchange: Costs and risks of converting between currencies

Ways to Invest Globally

Direct International Investment

Buying stocks directly on foreign exchanges requires:

  • International brokerage account
  • Understanding of local market rules
  • Awareness of currency exchange impacts
  • Knowledge of foreign tax implications

American Depositary Receipts (ADRs)

ADRs offer a simpler way to invest in foreign companies:

  • Trade on U.S. exchanges
  • Priced in U.S. dollars
  • Follow U.S. reporting standards
  • Examples include Toyota (TM) and Alibaba (BABA)

Exchange-Traded Funds (ETFs) and Mutual Funds

The most accessible option for most investors:

  • Professional management
  • Instant diversification
  • Lower transaction costs
  • Available for specific regions or global exposure
  • Examples include VXUS (Vanguard Total International Stock ETF)

Building a Global Portfolio

Asset Allocation Considerations

When determining your international allocation, consider:

  1. Investment Goals: Growth vs. stability
  2. Risk Tolerance: International markets can be more volatile
  3. Time Horizon: Longer horizons may allow for more international exposure
  4. Current Market Conditions: Relative valuations between markets

Common allocation approaches:

  • Market-weight approach (approximately 40% international)
  • Conservative approach (20-30% international)
  • Aggressive approach (50%+ international)

Risk Management

Key strategies for managing international investment risks:

  1. Start Small: Begin with a modest international allocation
  2. Use Diversified Funds: Spread risk across multiple countries
  3. Focus on Quality: Emphasize established companies and markets
  4. Monitor Currency Exposure: Consider hedged options if concerned about currency risk
  5. Regular Rebalancing: Maintain desired allocations as markets move

Common Challenges and Solutions

Challenge 1: Information Access

  • Solution: Use international financial news sources
  • Focus on ADRs with U.S. reporting requirements
  • Rely on professional management through funds

Challenge 2: Currency Risk

  • Solution: Consider currency-hedged funds
  • Maintain long-term perspective
  • Diversify across multiple currencies

Challenge 3: Political and Economic Risk

  • Solution: Emphasize developed markets for stability
  • Use dollar-cost averaging to reduce timing risk
  • Maintain appropriate position sizes

Action Steps

  1. Review your current portfolio for geographic exposure
  2. Determine appropriate international allocation based on your goals
  3. Research international investment options (ADRs, ETFs, mutual funds)
  4. Start with broad, diversified international funds
  5. Gradually adjust allocation based on comfort and experience

Key Takeaways

  • International investing offers diversification benefits and growth opportunities
  • Different markets have varying characteristics and risks
  • Multiple options exist for gaining international exposure
  • Start conservatively and increase exposure gradually
  • Regular monitoring and rebalancing are essential

Frequently Asked Questions

Q: How much international exposure should I have?
A: A common starting point is 20-40% of your stock allocation, adjusted based on your goals and risk tolerance.

Q: Are emerging markets too risky for average investors?
A: While riskier, small allocations to emerging markets through diversified funds can be appropriate for many investors.

Q: Should I hedge currency risk?
A: Currency hedging can reduce volatility but may also limit potential gains. Consider your risk tolerance and time horizon.

Q: Are ADRs as good as buying local shares?
A: ADRs offer convenient access to foreign companies but may have higher costs and lower liquidity than local shares.

Q: How do international investments affect my taxes?
A: International investments may have additional tax considerations, including foreign tax credits. Consult a tax professional for guidance.

Note: This article is part of our US Equities Education Series. For a foundational understanding, please refer to Articles 1-7, particularly Article 3 on "Building Your Portfolio."

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