I believe that all investors should have a portion of their portfolio allocated to investments outside of the U.S. Although the U.S. stock market is the world’s largest, overseas markets regularly outperform U.S. markets. The major reason is, local factors can have a big impact on each country’s business cycle. Of course, that dynamic can cut both ways and you also need to be aware of the risks.
How much to invest internationally is a personal preference. I have seen recommendations from 5% to 40%, but most financial advisors seem to recommend about 20%. I just checked my own allocation, and it is 58% domestic stocks and 18% international stocks. (My remaining allocation is 12% bonds, 7% options, and the rest in cash.)
One factor to keep in mind is that political and currency risks differ from country to country. It’s a good idea to stick to the markets in developed countries. Returns in developing countries can be very high from time to time, but the risks are high as well. Investing in large companies in developed countries can give you international exposure at modest risk.
There are several ways to invest internationally. One of the easiest ways is probably through a mutual fund. Fidelity’s mutual fund screener lists 537 international equity mutual funds. Of those, 150 are rated 5 Star by Morningstar, and 6 are rated as 5 Star and Low Expense. Those six funds are:
If you are more of a “do-it-yourself” investor, there are plenty of ways to invest directly in international companies.
One of the more common ways of investing directly in international companies is through the Over the Counter (OTC) markets. For example, recently in my trading service Utility Forecaster, I took a look at global water utilities. UK-based Pennon Group ADR (OTCMKTS: PEGRY) and France’s Veolia Environnement SA (OTCMKTS: VEOEY) are foreign water utilities that you can buy through the OTC market. However, there is additional risk in trading in the OTC markets. There is less transparency, and a higher chance of getting unfavorable pricing on your trades.
A safer bet is to purchase foreign stocks on the New York Stock Exchange as American Depositary Receipts (ADRs). These are negotiable instruments that represent ownership in securities of a foreign company. This is a mechanism that facilitates U.S. trading of foreign securities, but with a high level of transparency. ADRs trade exactly like stocks. In fact, many people who own ADRs may not even realize it.
Fidelity’s stock screener lists 510 ADRs. The 10 highest-rated companies according to Fidelity’s rating system are:
This list is very energy-centric, because the energy sector is still relatively undervalued. But the list is geographically diverse, and you can easily find good international ADRs in every S&P 500 sector.
Regardless of how you do it, you may want to conduct a portfolio checkup and see how much international exposure you have. Don’t let “home bias” cause you to overlook the rest of the world. There are a lot of quality companies out there.
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