Investing internationally has grown rapidly in recent years. The
bias for investing only within our national borders is diminishing,
as an increasing number of individual and institutional investors
boost their international exposure to pursue their investment
goals. Behind the trend toward international investing are the
realizations that the global market can offer attractive
opportunities for investment and that diversification abroad can
help reduce risk.
Shift in U.S. and World Market
Source: ChartSource®, DST Systems, Inc.
Market-share data is from the World Federation of Exchanges.
Estimate for 2030 is based on the rate of growth of non-U.S.
markets vs. the U.S. since 1975. Past performance is not a
guarantee of future returns. © 2018, DST Systems, Inc. All
rights reserved. Not responsible for any errors or omissions.
The Investment World Grows Larger
In 2017 foreign markets represented 62% of the world's
investment opportunities. It is estimated that by 2030 the U.S.
stock market will represent just 32% of the world
Diversification and Higher Returns
The quest for diversification and higher returns are driving
forces behind the internationalization process. When U.S. investors
began to invest in foreign equities, a key reason for the move was
increased diversification. Because international markets do not
always move in sync -- some may zig while the others zag --
diversification on a global scale may help offset the effect of a
downturn in the U.S. market. Investors in international securities
may face additional risks, such as higher taxation, less liquidity,
political problems, and currency fluctuations, that do not affect
domestic investors. But despite these risks, the potential for
higher returns and diversification makes these markets attractive
to many investors.
As investors around the world become more sophisticated and
aggressively explore investment opportunities, they find that the
global arena can offer competitive returns. The MSCI Europe,
Australasia, Far East (EAFE) index, which tracks 21 major world
markets, posted a 5.97% annualized rate of return for the 30 years
ended December 31, 2017, compared with the 10.70% annualized return
of the S&P 500 index.1 Past performance does not
guarantee future results.
This difference in returns is due in part to differences in
economic and market environments in countries around the world. For
example, the Japanese market throughout the 1990s was depressed due
to the country's economic recession. Many Japanese stocks became
undervalued. In 1999 the Japanese stock market bounced back,
producing a gain of more than 60%.2
How to Invest in Foreign Equities
One way you can include international exposure in your portfolio
is to invest in stocks of U.S. companies that derive a large
portion of their annual revenue from overseas markets. Examples of
such companies are Coca-Cola and McDonald's.
You can also buy stocks of foreign companies through
American Depositary Receipts (ADRs) -- traded on
the New York Stock Exchange -- and through mutual funds that invest
in foreign companies. ADRs are negotiable certificates that
represent the shares of a publicly traded foreign company. ADRs are
issued in the United States and their underlying shares are held in
But familiarizing yourself with international markets (including
the regulatory, political, and economic environments) is time
consuming, and access to company information can be difficult to
obtain. An easier way to invest internationally is to buy shares of
broadly diversified international mutual funds or
exchange-traded funds, which invest exclusively
overseas, or global funds, which may buy a mix of
foreign and U.S. stocks. These types of funds offer instant
diversification through an array of foreign market stocks.
For more experienced and more aggressive investors wishing to
target stocks in particular regions or countries,
regional or country funds are
also available. These funds are designed to take advantage of
specific opportunities in the world's developed and emerging
markets, but they do carry an increased risk of volatility.
This chart compares the annual total return of the S&P 500
index (U.S. stocks) and the MSCI EAFE index (foreign stocks) for
the calendar years from 1988 to 2017.
Source: ChartSource®, DST Systems, Inc. For the
period from January 1, 1988, through December 31, 2017. Stocks are
represented by the S&P 500 index. Foreign stocks are
represented by the MSCI EAFE index. It is not possible to invest
directly in an index. Index performance does not reflect the
effects of investing costs and taxes. Actual results would vary
from benchmarks and would likely have been lower. Past performance
is not a guarantee of future results. © 2018, DST Systems,
Inc. Reproduction in whole or in part prohibited, except by
permission. All rights reserved. Not responsible for any errors or
Special Risks of International Investing
International investing does present unique risks and
considerations. A U.S. investor's foreign-investment return depends
on both the local currency's exchange value against the U.S. dollar
and the stock price in the local currency. For example, falling
currency values and plummeting stock prices in Asian nations in
1998 not only drove down stock prices for international investors
in Asia, but also in the U.S., because many American companies
depend on Asia for customers. For U.S. investors, currency losses
could also stem from a rise in the dollar's value against the
currency of the foreign country they are investing in. In the past,
currency fluctuations have tended to balance out over extended
periods of time, although there are no guarantees this will always
be the case. Maintaining a long-term perspective and diversifying
international investments can help minimize these risks.
|Domestic vs. Foreign Stock
This chart shows when developed foreign markets (EAFE)
outperformed or underperformed domestic markets (S&P 500) over
trailing three-year periods.
Source: ChartSource®, DST Systems, Inc. Based on
36-month rolling periods from the period ended January 31, 1988,
through the period ended December 31, 2017. U.S. stocks represented
by the S&P 500 index. Foreign stocks represented by the MSCI
EAFE index. It is not possible to invest directly in an index.
Index performance does not reflect the effects of investing costs
and taxes. Actual results would vary from benchmarks and would
likely have been lower. Past performance is not a guarantee of
future results. © 2018, DST Systems, Inc. Reproduction in
whole or in part prohibited, except by permission. All rights
reserved. Not responsible for any errors or omissions.