International Stocks

While international stocks are subject to geopolitical, regulatory, and currency risk, a foreign security should not be judged solely because it is not a U.S. domestic product. Investors should take multiple factors into consideration when considering investing in international stocks, such as geographical location, level of development, and liquidity of the markets and complex tax regimes. Additionally, U.S. domestic securities can be just as risky as some foreign ones.

Taking a global perspective means incorporating both U.S. and international stocks in your portfolio. The marketplace is truly global, and when it comes to investing, geographical location matters a lot less than it used to. Depending on your return objectives and risk tolerance, your international allocation should be 5%–40% of your total stock market investments and the international weighting necessary for truly global exposure is likely to increase over time as global trends become even more entrenched. Investing in international stocks still carries risks, but if you limit your international exposure, you may miss out on attractive growth opportunities as well as the increased diversification that can help buffer your portfolio against market downturn.

Simply put, home bias (or 'home country bias') is the conscious or unconscious choice of investors to invest the entirety or majority of their assets in domestic investment products – we're inclined to believe in and root for the things that we know best. While this may be human nature, home-country bias limits an investor's universe of available opportunities. Worse, it may not be prudent given the nature of today's global markets: roughly one-third of multi-national corporations are headquartered outside of the United States, which corresponds to global gross domestic product ratios.

Get more information on why global diversification matters.

When investing in international stocks, it is beneficial to understand the differences between developed and emerging markets to better comprehend the risks, potential, liquidity, and stability of international investment products.

• Developed Markets (DMs) are countries who are economically the most advanced – they have highly developed capital markets, are well regulated with higher per capita income, and have a large market capitalization and greater liquidity. They include, but are not limited to, such countries as the U.S., Canada, the United Kingdom, Germany, Australia, and Japan.
• Emerging Markets (EMs) are countries that are currently experiencing rapid economic and household income growth as well as rapid industrialization. As opposed to developed markets, they tend to have lower household incomes, economic development and reform programs under way, less maturely functioning stock and bond markets and rules of conduct, lower liquidity, and are undergoing structural changes such as modernization of infrastructure and/or moving from a dependence on agriculture to manufacturing. Brazil, Thailand, India, and China are examples of some emerging markets.

It is important to note that these are not fixed definitions; different financial bodies differentiate between developed and emerging markets using varying criteria and what one entity might characterize as emerging could be considered developed by another.

Dividends paid on foreign equities are generally subject to foreign tax withholding. These taxes vary greatly depending on the country, security, and account type and can be affected by international tax treaties between countries. When foreign tax is withheld, U.S. investors may be eligible for a foreign tax credit and/or lower tax than the statutory rates applied by jurisdictions.