You can probably achieve your financial goals while sticking to US stocks, but exposure to international stocks might be desirable as well, depending on your individual financial circumstances. Here are three reasons why.
Diversification: First, academic research shows that investors have better outcomes over the long term when they spread their money around-among asset classes, market capitalizations, and even countries. Indeed, some academics believe you should have no more than half of your equity portfolio in stocks from any one country. That may not be right for everyone, but it’s a viewpoint worth considering.
Performance: In addition, the United States has a strong economy and stock market, but history tells many stories of strong stock markets that encountered problems. And there have been long periods in which international stocks have outperformed US stocks. From 2000 through 2009, for example, the S&P 500 Index lost 0.9%. International stocks generally performed much better, from 1.2% to 12.8%, according to MarketWatch.
Opportunity: Finally, more than half of the world’s market capitalization is outside the United States, and many international markets are growing rapidly. China and India are just two examples. There were 4.7 million science, technology, engineering, and mathematics (STEM) graduates in China in 2016, and 2.6 million in India, according to McKinsey Global Institute. There were just 568,000 in the United States. And ample venture-capital funding is available to innovative Chinese companies. So there is good reason to believe that, over the long term, international stocks have significant potential.
Of course, international equities have risks that US stocks don’t, including lessened trading transparency and heightened volatility, so it is important to consider your risk tolerance when investing in them. Your financial advisor can help you decide if they are right for you, and, if so, what role they should play in your portfolio.