Is investing internationally worth it?

4 Reasons To Invest Internationally

  1. Positive international outlook
  2. Volatility reduction
  3. Exposure to some of the top companies in the world
  4. Higher dividend yield

You likely may be locked into a home bias, not realizing how much this lack of diversification is costing you over the long term. While international equities have lagged their U.S. counterparts lately, there are still some excellent reasons to consider an allocation to investments outside of the U.S.

Financial markets around the world change rapidly in response to news and events and by avoiding international stocks you are excluding a large portion of the global opportunity set. In fact, international stocks represent almost 44% of the global mark—a figure too large to ignore.

Positive international outlook

U.S stocks have had a great run, but will that continue? While we believe the price/ earnings ratios for stocks are some of the best indicators of future returns, we also recognize that you must take into account valuations from a fair value standpoint, factoring in global economic and market changes.

Based on these valuations, the expected return outlook for non-U.S. stocks over the next 10 years is higher than that of U.S. stocks.

Global non-U.S. equity annualized returns (in U.S. dollars)

Next ten years:

8.5% – 10.5%

U.S. equity annualized returns

Next ten years:

5.5% – 7.5%

Exposure to some of the top companies in the world

Not all great stocks are found in the domestic markets as companies based outside the U.S. make up nearly half of the value of stocks worldwide.

By only investing in U.S. stocks, you miss out on leading companies found in the emerging and developed markets. In fact, Alibaba, Tencent, and Nestle are names found among the top ten largest companies.

Change in portfolio volatility when including non-U.S. stocks in a U.S. portfolio, 1970–2020

  • Alibaba
  • AstraZeneca
  • HSBC
  • Nestle
  • Novartis
  • Roche
  • Taiwan Semiconductor
  • Tencent
  • Toyota

Volatility reduction

Having a mix of international and U.S. stocks has historically tamped down the volatility in portfolios. Of course, it’s natural to be concerned about geopolitical risk, but having a mix of U.S. and international can actually reduce portfolio risk.

Adding international stocks to a portfolio can carry diversification benefits because of the less-than-perfect correlations due to differences in economic cycles, fiscal and monetary policies, currencies, and sector weighting.

As you can see in the chart, the maximum volatility reduction benefit of adding an allocation to international equities occurs between the 20%–50% range.

Change in portfolio volatility when including non-U.S. stocks in a U.S. portfolio, 1970–2020

Higher dividend yield

Another reason to look beyond U.S. borders is the higher-yield-generating opportunities available outside of the U.S. While domestic dividend-oriented strategies have fared well, international stocks can offer favorable dividend values.

An international portfolio has historically experienced a higher dividend yield than that of a U.S.- only portfolio

Global dividend yields

For more information about international investing, speak with one of our Redbridge Financial representatives.