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Investors who stay "close to home" may miss growth opportunities

Key takeaways

  • International stocks may offer many long-term growth opportunities that are unavailable in the US.
  • Historically, exposure to overseas stocks as part of a hypothetical diversified portfolio led to strong long-term results and lower volatility.
  • Just like US stocks, international stocks can experience periods of volatility, but Fidelity’s investment research team believes the long-term outlook is positive. 

 

Over the last few years, US stocks have experienced stronger gains than international stocks. This has led some investors to focus primarily on US stocks for their investments. 

However, looking ahead, investors may want to consider adding some exposure to international stocks, says Naveen Malwal, institutional portfolio manager with Strategic Advisers, LLC, the portfolio investment team for many managed account clients at Fidelity. “Fidelity's Asset Allocation Research Team (AART) expects international stocks to potentially outperform US stocks over the next 20 years,“ he says. “But beyond the potential for healthy returns from international stocks, they can also help provide smoother returns for US-based investors.”

Here are 3 key reasons to consider international stocks for your portfolio.

Home-country bias can limit investment options

Many US investors tend to favor investing in US stocks, a phenomenon known as home-country bias. Part of the reason is the human tendency to prefer the familiar, in all parts of life. By default, we tend to choose the foods we grew up with, buy brands we've purchased before, and hang out with people we already know. In investing, that usually means sticking with companies we've heard of—maybe even one you or your family has worked for. "But whether you know of or use a company's products has virtually no bearing on the future performance of its stock," says Malwal.

In addition, some investors may wish to steer clear of certain countries because of political concerns or issues with market transparency. However, "international portfolio managers think about global businesses with worldwide revenues," says Malwal. "So international investing doesn't have to mean a positive outlook on governments or the economies of a given country. Rather, it's about looking at specific business opportunities that happen to be headquartered outside of the US."

In fact, many popular goods or brands that are familiar to US households are headquartered overseas. Within developed markets, this could include cars from German auto companies, luxury goods from France or Italy, medicine from Swiss pharmaceuticals, or coats and yoga pants from Canadian clothing brands. Meanwhile, popular goods or brands in emerging markets could include phone and high-end electronics manufacturers in Asia, food companies from Central and South America, or energy producers in the Middle East.

Home-country bias can limit your investment opportunities

This graphic depicts 3 facts about non-US stocks and markets: Non-US markets represent 75% of the world's gross domestic product, 79% of publicly listed companies, and 43% of global stock market capitalization.
Sources: For world's economic output (gross GDP): International Monetary Fund, World Economic Outlook Database, October 2020. For publicly listed companies and global stock market capitalization: Morningstar, using MSCI ACWI index constituent data, as of 12/31/20.

International exposure can help mitigate volatility

Because US stocks have outpaced international stocks over the last few years, many investors may believe that non-US equities tend to underperform compared to their US counterparts. Historically, that hasn't always been the case. 

Over the past 2 decades, there have been calendar years in which international stocks have outperformed US stocks and vice versa. Long term, however, the returns on a globally balanced and US-only portfolio have been similar. Between 1950 and 2022, a hypothetical, globally balanced portfolio made up of 70% US stocks and 30% international stocks would have returned an annualized 11.1%, almost matching the returns on a hypothetical portfolio invested solely in US stocks, which would have returned an annualized 11.2%. 

But here's how international stocks helped: In this hypothetical example, the globally balanced portfolio had a lower standard deviation, a widely accepted measure of volatility.1 "This shows how a 70/30 portfolio could potentially provide strong return potential with less volatility than a 100% US stock portfolio," Malwal says. 

US multinational exposure may provide limited benefits

Some investors may also believe that investing in US multinational companies can provide adequate exposure to international markets. They may point to the fact that about a third of S&P 500 revenue comes from overseas2—what is known as the pass-through effect. But according to Malwal, there's only so much international exposure one can get by investing in multinationals. "For example, if there's an economic boom happening in some countries, those local businesses are more likely to directly benefit from that than a US-based company with some foreign earnings exposure," he says.

In tumultuous times, international investments can offer exposure to companies that may be affected differently by geopolitical situations. For example, higher commodity prices often create headwinds for US stocks. But non-US commodity producers have generally seen their revenues soar when commodity prices are high. These companies rely on selling energy, metals, or agricultural products (food and fertilizers) for their earnings. "Even in 2022, which was a volatile year for stocks, international portfolio managers found opportunities to add exposure to stocks that had earnings growth potential," Malwal says.

International portfolio managers can help balance risk and long-term returns

Given the breadth of investing opportunities in a global world, international investing can seem daunting, especially since exposure to foreign currency movements or geopolitical developments are part of international investing. This makes both careful security selection and diversification within portfolios important for spotting opportunity while seeking to avoid undue risk, Malwal suggests. With those factors in place, some exposure to international stocks may help investors reach their financial goals. "The world population continues to grow and more people are moving up from poverty to the middle class," Malwal says, "so global corporate earnings are likely to head higher over time. Historically, corporate earnings growth has led to rising stock prices. That's why I believe international stocks can be an important part of a well-diversified portfolio." 

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1. Hypothetical "globally balanced portfolio" is 70% US and 30% international stocks, rebalanced annually, from 1950 - 2021. Standard deviation is the statistical measure of market volatility, measuring how widely prices are dispersed from the average price. In this hypothetical example, the standard deviation of the US-only portfolio was 14.4%, while the standard deviation of the globally balanced portfolio was 13.4%. US Stocks refers to the S&P 500® Total Return Index; International stocks refers to the MSCI ACWI ex-US Index. Source: Fidelity Investments (AART), as of 12/31/2021. Past performance is no guarantee of future results. 2. S&P Global, The Impact of the Global Economy on the S&P 500. Data as of December, 2017.

Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

The commodities industry can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions.

Foreign markets can be more volatile than U.S. markets due to increased risks of adverse issuer, political, market, or economic developments, all of which are magnified in emerging markets. These risks are particularly significant for investments that focus on a single country or region.

Investing involves risk, including risk of loss.

Past performance is no guarantee of future results.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

Indexes are unmanaged. It is not possible to invest directly in an index.

The S&P 500® Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent US equity performance. MSCI All Country World (MSCI ACWI) Index is an unmanaged market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed and emerging markets. MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid-cap stocks in developed and emerging markets, excluding the United States. The Dow Jones U.S. Total Stock Market Index is a float-adjusted market capitalization–weighted index of all equity securities of U.S.-headquartered companies with readily available price data. The views expressed in the foregoing commentary are prepared by Strategic Advisers LLC, based on information obtained from sources believed to be reliable but not guaranteed. This commentary is for informational purposes only and is not intended to constitute a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The information and opinions presented are current only as of the date of writing, without regard to the date on which you may access this information. All opinions and estimates are subject to change at any time without notice. This material may not be reproduced or redistributed without the express written permission of Strategic Advisers LLC.

Optional investment management services provided for a fee through Fidelity Personal and Workplace Advisors LLC (FPWA), a registered investment adviser and a Fidelity Investments company. Discretionary portfolio management provided by its affiliate, Strategic Advisers LLC, a registered investment adviser. These services are provided for a fee.

Brokerage services provided by Fidelity Brokerage Services LLC (FBS), and custodial and related services provided by National Financial Services LLC (NFS), each a member NYSE and SIPC. FPWA, Strategic Advisers, FBS, and NFS are Fidelity Investments companies.

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