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Investing Without Borders

At the supermarket, you may put Budweiser beer, Hellmann’s mayonnaise or Ben & Jerry’s ice cream in your cart. Chances are you don’t care that an overseas company owns each of those brands. Most people buy a brand because they think it’s the best, or the best value, regardless of where its parent company is headquartered.

It may be worth taking the same approach to your investments. Because of globalization, even a portfolio invested only in U.S. stocks is likely to be influenced by global developments. Many U.S. stocks actually have direct exposure to international markets through foreign sales and operations. Likewise, a portfolio invested entirely in non-U.S. stocks will still typically have some indirect exposure to the United States.

But just because you get a dash of international exposure from your domestic investments doesn’t mean you should forgo allocating part of your portfolio to foreign assets. Rather, you should be thinking about your portfolio with a global point of view. Looking at the whole world gives you access to the widest selection of opportunities. Why limit yourself?

“The world has increasingly become one global marketplace in which companies sell and operate,” says Jeffrey Kleintop, Charles Schwab’s Chief Global Investment Strategist. “This new reality means investors should think less about borders and more about adopting a global perspective.”

Here’s why.

1. Sectors matter more than countries.

When investing outside the United States, investors often make decisions first by country or region, rather than by sector. But buying the stock of a company in a certain country isn’t the same as owning a share in that country. The sector in which a company operates can be much more important than its location.

Our research has found that the stocks of big, global companies are much more likely to behave like other stocks in the same sector than like the stocks of companies that just happen to be from the same country.  

For example, you might assume that stocks in Europe’s consumer discretionary sector have languished over the past few years, given the region’s double-digit unemployment rate, recessions in some European countries and decreased lending to households. Yet Europe’s consumer discretionary stocks, as measured by the MSCI Europe Consumer Discretionary Index, rose an annualized 21% in dollar terms between June 30, 2012, and June 30, 2015—just shy of the 23% return of the MSCI USA Consumer Discretionary Sector Index during the same period.

“Where a company is headquartered matters relatively little compared with its sector and other global macroeconomic drivers,” Jeffrey says. “The point is to look for opportunities wherever they may be.”

However, he also cautions that while global sectors are generally more important than geography for large-cap stocks in developed countries, this may not always be true for other stock classes.

“Regional and country-specific factors tend to have more influence on the performance of international small-cap and emerging market stocks,” he says. “This means it is still possible to obtain country-specific diversification benefits in the global stock markets by investing in the stocks of small and emerging market-based companies.”

2. The growth engines of the future could provide new opportunities.

A lack of international exposure would mean missing out on some major worldwide investment themes, most significantly the rise of the global middle class. By 2030, 93% of the global middle class will be from emerging markets, according to World Bank estimates. Global providers of household products, cars and many other items may benefit from the middle-class megatrend.

Meanwhile, demand for financial and health care services is also likely to grow. Increasing incomes may mean emerging market citizens have more savings and accumulate more wealth. In addition, as people move into the middle class, they tend to consume more meat, dairy and sugar.  The broader adoption of higher-calorie diets could lead to health problems when combined with the less-active lifestyle resulting from increased urbanization.

Another theme is the global adoption of mobile technology. The traditional notion that consumers in developed countries are quick adopters of new technologies, with the emerging world slow to catch up, may no longer hold. For example, the adoption pattern of mobile phones in emerging-market countries such as Turkey, Chile and Lebanon is similar to that of the United States, according to data from the Pew Research Center. And the percentage of adults who own a mobile phone in China and Russia—two emerging market countries—is even higher than our domestic rate.

Broad themes like this could provide new growth opportunities for companies around the globe.

3. There are opportunities for growth and diversification abroad.

By limiting your international exposure, you may be missing out on attractive growth opportunities. More than 50% of the world’s stock market capitalization now lies outside the United States. Additionally, at least half of the top 10 stocks in the global financial, health care, telecommunications services, energy and materials sectors are headquartered abroad, based on the constituents of the MSCI World Index (which includes both U.S. and international stocks).

International exposure also offers increased diversification that can help buffer your portfolio against market downturns. For example, during the worst 10-year period for stocks over the past 45 years, which was from February 1999 to February 2009, the MSCI USA Index fell an annualized 4.2%, while the global stocks in the MSCI World Index—which includes some U.S. stocks—lost an annualized 2.5%. (It’s worth noting that the developed-market international stocks measured by the MSCI EAFE Index lost just 1% during that period.) That may not seem like a dramatic difference, but compounded over the 10-year period it amounted to a difference of 13% in portfolio value between U.S. and global stocks.

For decades investors have asked: “What is the right international stock market weighting for a portfolio?” A better question now is: “How should you allocate your investments to take advantage of the global opportunity and fully benefit from a global perspective?”

In general, allocating between 25% and 50% of your stock holdings (or more, depending on your risk and return objectives) to international equities could give your portfolio a more global perspective. This may sound high, but the international weighting necessary for truly global exposure is likely to increase over time as opportunities evolve and globalization becomes even more entrenched.

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Important Disclosures

Past performance is no guarantee of future results.

International investments involve additional risks, which include differences in financial account standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Diversification does not eliminate the risk of investment losses.

Indexes are unmanaged and not available for direct investment.

The MSCI Europe Consumer Discretionary Index is designed to capture the large- and mid-cap consumer discretionary securities across 15 developed-market countries in Europe: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

The MSCI USA Consumer Discretionary Sector Index is designed to capture the large- and mid-cap U.S. consumer discretionary securities.

The MSCI World Index captures large- and mid-cap representation across 23 developed-market countries: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. With 1,642 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.

The MSCI USA Index is designed to measure the performance of the large- and mid-cap segments of the U.S. market. With 639 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the U.S.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.


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