Video Lesson
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Why Invest Outside the US?
The United States is home to the world's largest stock market, but it's not the only one. By holding only US stocks, you're ignoring 40% of the world's investable equity. History shows that different regions take turns leading global returns. International diversification smooths the ride and can boost long-term results.
Developed vs Emerging Markets
International stocks are broadly split into two categories. Developed markets — Germany, Japan, the UK, Canada — have mature economies and relatively stable political systems. Emerging markets — China, India, Brazil, South Korea — offer faster economic growth potential but with higher volatility and additional risks including currency and governance concerns.
How to Invest Internationally
- Total International ETF (e.g. VXUS): covers all non-US stocks in one low-cost fund
- Developed-only fund (e.g. EFA): excludes emerging market volatility
- ADRs: buy individual foreign stocks on US exchanges in US dollars
Currency Risk: The Hidden Factor
When the dollar strengthens, foreign investment returns shrink in USD terms. When it weakens, returns are amplified. Over long periods, currency effects tend to even out. For most long-term investors, unhedged international funds are the practical and cost-effective choice.
How Much International Exposure?
A common starting point is 70% US stocks, 30% international. The global market-cap-weighted approach suggests closer to 60/40. Either is reasonable — what matters is holding some international exposure consistently and not abandoning it during periods of US outperformance.