International Portfolio Advantages and Limitations

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An international portfolio is a selection of stocks and other assets that focuses on foreign markets rather than domestic ones. An international portfolio may appeal to the investor who wants some exposure to the stocks of economies that are growing faster than that of the U.S. The risks of such a strategy can be reduced by mixing emerging-market stocks with shares in some of the solid performers of industrialized nations. The investor might also take a look at some of the U.S. companies that are experiencing their fastest growth abroad. The most cost-effective way for investors to hold an international portfolio is to buy an exchange-traded fund (ETF) that focuses on foreign equities, such as the Vanguard FTSE Developed Markets ETF or the Schwab International Equity ETF. The domestic portfolio may decline by 10% while the international portfolio could advance 20%, leaving the investor with an overall net return of 10%. Risk can be reduced further by holding a selection of stocks from developed and emerging markets in the international portfolio.

An international portfolio may appeal to the investor who wants some exposure to the stocks of economies that are growing faster than that of the U.S.

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An international portfolio is a selection of stocks and other assets that focuses on foreign markets rather than domestic ones. If well designed, an international portfolio gives the investor exposure to emerging and developed markets and provides diversification.

The risks of such a strategy can be reduced by mixing emerging-market stocks with shares in some of the solid performers of industrialized nations.

The investor might also take a look at some of the U.S. companies that are experiencing their fastest growth abroad.

Understanding the International Portfolio

An international portfolio appeals to investors who want to diversify their assets by moving away from a domestic-only portfolio. This type of portfolio can carry increased risks due to potential economic and political instability in some emerging markets, There also is the risk that a foreign market's currency will slip in value against the U.S. dollar.

The worst of these risks can be reduced by offsetting riskier emerging-market stocks with investments in industrialized and mature foreign markets. Or, the risks can be offset by investing in the stocks of American companies that are showing their best growth in markets abroad.

The most cost-effective way for investors to hold an international portfolio is to buy an exchange-traded fund (ETF) that focuses on foreign equities, such as the Vanguard FTSE Developed Markets ETF or the Schwab International Equity ETF.

Risky and Less Risky Choices

Over the recent past, the growth of the economies of China and India greatly exceeded those of the U.S. That created a rush to invest in the stocks of those countries. Both are still growing fast, but an investor in the stocks of either nation now would have to do some research to find stocks that have not already seen their best days.

The search for new fast-growing countries has led to some winners and losers. Not long ago, investors going for fast growth were looking to the CIVETS nations. They were Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa. Not all of those countries would still be on any investor's list of promising economies.

Currency risk is a factor in international investing. You can gain (or lose) as another nation's currency rate moves.

Meanwhile, in the more industrialized world, there are names that will be familiar to any American investor and they are available, directly or through mutual funds and ETFs. For example, the biggest holdings in Vanguard's Total International Stock Fund Index are China's Alibaba, Switzerland's Nestle, China's Tencent Holdings, South Korea's Samsung, and Taiwan Semiconductor.

It's worth noting that, as of June 2021, only 25.60% of the fund's holdings were invested in emerging markets, with 39.70% in European assets and the rest spread around the globe.