Aug 19, 2021
Up until the last few years, average investors tended to shy away from the world outside their borders.
Even financial legends like Warren Buffett and Jack Bogle have questioned the necessity of buying stocks abroad, due to concerns over currency volatility and political instability.
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But things are slowly shifting. Thanks to the growth of the global economy, investors are realizing that great opportunities come from all over — particularly in emerging markets.
It’s also relatively easy to invest in global stocks these days, so it’s no surprise that investors are devoting a much larger portion of their portfolio to overseas investing.
What is global investing?
First off, a quick definition: Global investing simply refers to investing in businesses based in countries other than your own.
These companies can range from unknown startups in South America to name-brand giants like Toyota in Japan, Anheuser-Busch in Belgium or Adidas in Germany.
Naturally, global investing gives people access to a much broader universe to construct their portfolios.
Investors generally have the same options available to them internationally as they do domestically. Whether a U.S. investor wants to invest in stocks, bonds, ETFs or mutual funds, there’s a global alternative for it all.
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Advantages of global investing
Taking your investing global has three main advantages: diversification, an expanded universe of opportunities and global growth potential.
Let’s take a look at them one by one.
1. Diversification
Most investors know the golden rule of not placing all your eggs in one basket.
We’re always taught to diversify our portfolio across different asset classes (stocks, bonds, cash), investment styles (value, growth) and even company size (small-cap, mid-cap, large-cap).
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But global investing takes diversification to a whole different level.
Allocating across global markets provides an extra layer of stability during times of turbulence. The more you spread out your investments across different countries, the better chance you have to reduce correlations within a portfolio and find untapped sources of return.
Many different factors — such as economic growth, interest rates and political stability — dictate which regions outperform (and underperform) at any given time. But you can never predict when.
By sprinkling your money on investments around the world, you have constant exposure to countries that are booming, which goes a long way toward minimizing risk.
2. More opportunities
Another obvious benefit of global investing is being able to fish in a much, much bigger pond. The U.S. isn’t the only place where great businesses exist.
China, for example, “has the second-largest equity market, the second-largest bond market," Wei Li, chief investment strategist at the BlackRock Investment Institute, tells the Financial Times. "It should be represented more in portfolios.”
By limiting your search to just domestic companies, you artificially narrow your list of opportunities.
While investing abroad comes with a unique set of risks and often an extra amount of work, investing in just a few foreign winners can be worth it.
You don’t have to go digging for hidden gems, either.
Brazilian mining gorilla Vale has provided an average annual return of 30% over the past five years. Meanwhile, Japanese video game giant Nintendo has returned an average of 18% over the same time frame.
3. Faster growth
The U.S. economy is still the world’s largest, to be sure. But its massive size will likely serve as an anchor moving forward.
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The rise of the middle class in emerging countries and population growth outside the U.S. are expected to drive most of the global growth over the next several decades.
Additionally, rising per-capita productivity in a powerhouse like China (with a population of about 1.4 billion people) suggests that the most fruitful places to invest will be overseas.
By limiting your investment search to just domestic companies, you miss out on tremendous gains from some of the world’s fastest-growing areas.
According to the IMF, the world’s fastest-growing economies in 2021 include regions such as Macau (56%), Guyana (16%), and India (13%). Meanwhile, the U.S. economy is expected to grow at a pace of 6.4% for the year.
How to invest internationally
There are a few different ways to access foreign stocks, including buying them directly in a “global account” offered by a broker like Fidelity, E*TRADE or Interactive Brokers.
But that method isn’t ideal for average investors. Direct foreign investing comes with added costs, tax implications, currency converting and a whole host of support issues.
However, with the rising popularity of exchange-traded funds (ETFs) and the rapid increase of American Depository Receipts (ADRs), getting around those headaches is no problem.
Foreign ETFs
It’s probably no surprise to regular readers, but ETFs are the simplest way to gain exposure to international markets. Investing in a few well-chosen ETFs is more straightforward than picking a bunch of global stocks on your own.
ETFs also let you target the exact geographies that you want. Some ETFs provide exposure to a group of regions, while others invest in a single country.
In addition to geography, global ETFs cover a wide variety of investment categories — such as market cap, style and sector — for further diversification possibilities.
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For instance, the Vanguard FTSE Developed Markets ETF gives you access to 1,000 large-caps in developed overseas markets like Western Europe, Japan and Australia. Meanwhile, the iShares MSCI Emerging Markets Small-Cap ETF provides exposure to small public companies in emerging markets including Taiwan, India and Brazil.
You can easily invest in foreign ETFs through any number of investing apps — although a few will give you a free stock just for signing up.
American Depository Receipts (ADRs)
Buying individual ADRs is the other no-fuss method of gaining access to global stocks.
ADRs are simply certificates issued by a depository bank that represent shares in a foreign corporation but are listed on a domestic exchange.
ADRs were created specifically to sidestep the currency, tax and cost issues of buying foreign stocks directly. They are listed, bought, sold and settled just like stocks of U.S.-based companies, making them a breeze to invest in.
Plus, commission-free investing apps are offering a bigger and bigger menu of ADRs practically by the day.
Case in point: One of the most popular apps currently offers access to over 650 global stocks through ADRs. They range from well-known brands like Nintendo (Japan), Adidas (Germany) and Alibaba (China) to global stalwarts such as AstraZeneca (England), Nokia (Finland) and Vale (Brazil).
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The bottom line
With the U.S. stock market continuing to hit all-time highs and valuations getting stretched, prudent investors might want to start diversifying across different countries around the world.
And with decades of expected global growth ahead — particularly from emerging markets — it might even prove to be a very lucrative time to start.
The unique risks of global investing — including currency fluctuations, political turmoil and unfamiliar business practices — should never be overlooked. Newer investors might try a low-stakes approach of using an investment app.
But as long as you conduct due diligence, taking your investing globally can be one of the smartest financial moves you make.
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Brian is an editor for Moneywise. A long-time stock junkie, his work has appeared in The Motley Fool, Seeking Alpha, and Yahoo Finance. He believes in owning "Forever Stocks" — a rare group of businesses that have paid out dividends for decades. Brian holds the Chartered Financial Analyst (CFA) designation.
