How to Invest Internationally: A Starter Guide

American investors have a well-documented home bias — and we'll be honest, our platform currently reflects it — the tendency to invest almost exclusively in domestic stocks. And for the past fifteen years, that bias has been richly rewarded. U.S. stocks have dramatically outperformed international markets since the 2008 financial crisis, making global diversification feel like a drag on returns.

But the dominance of U.S. stocks isn't permanent. From 2000 to 2009, international stocks outperformed U.S. stocks by a wide margin. Leadership between U.S. and international markets has historically alternated in long cycles. Understanding how and why to invest internationally helps you build a portfolio that's prepared for whichever cycle comes next.

Why International Diversification Matters

The United States represents roughly 60% of global stock market capitalization, which means 40% of the world's investable equity market sits outside America. Companies like ASML, LVMH, Toyota, Nestlé, Samsung, and TSMC are among the most dominant businesses in the world. A U.S.-only portfolio excludes them entirely.

More importantly, U.S. and international markets don't move in lockstep. When one underperforms, the other often picks up the slack. This imperfect correlation is exactly what makes diversification valuable — it reduces overall portfolio volatility without necessarily sacrificing long-term returns.

Valuation differentials create opportunity. International stocks are trading at significantly lower price-to-earnings ratios than U.S. stocks — a gap that has widened to historically unusual levels. While cheaper doesn't always mean better, today's valuation gap suggests that international markets offer more return per dollar invested than the comparatively expensive U.S. market.

How to Invest in International Stocks

The simplest approach is through international index funds or ETFs. A total international stock market fund gives you broad exposure to developed and emerging markets in a single holding. These funds are low-cost, highly diversified, and require no specialized knowledge of individual foreign companies.

For more targeted exposure, you can separate developed international markets (Europe, Japan, Australia, Canada) from emerging markets (China, India, Brazil, Southeast Asia). Developed markets offer stability and high-quality companies with established governance. Emerging markets offer higher growth potential but with more volatility, political risk, and currency fluctuation.

American Depositary Receipts (ADRs) let you buy shares of individual foreign companies on U.S. exchanges, in U.S. dollars, through your regular brokerage account. Major companies like Toyota, Novartis, and Alibaba trade as ADRs. This is the path for investors who want to pick specific international companies rather than buying the whole market through a fund.

Risks of International Investing

Currency risk is the most immediate concern. When you invest in foreign stocks, your returns depend on both the stock's performance in its local currency and the exchange rate between that currency and the dollar. A European stock that rises 10% in euros but coincides with a 5% decline in the euro versus the dollar delivers only a 5% return in dollar terms.

Currency risk cuts both ways — a weakening dollar boosts international returns for U.S. investors. Over very long periods, currency effects tend to wash out, but over shorter periods, they can significantly amplify or reduce returns. Some international funds hedge currency exposure; others don't. Unhedged funds give you the full international experience, including currency diversification away from the dollar.

Political and regulatory risk is higher outside the United States. Governments may change rules on foreign ownership, impose capital controls, nationalize industries, or alter tax treaties. China's crackdown on its technology sector in 2021-2022 demonstrated how quickly regulatory action can destroy shareholder value in markets where government intervention is less predictable.

Accounting standards and corporate governance vary globally. While many developed countries have strong accounting standards comparable to U.S. GAAP, some emerging market companies operate in environments with weaker disclosure requirements, less independent board oversight, and fewer shareholder protections. Due diligence is more challenging and more important.

How Much to Allocate Internationally

Financial advisors typically recommend allocating 20-40% of your stock portfolio to international stocks. A market-weighted approach — matching global market capitalization — would put roughly 40% overseas. A more conservative approach might start with 20% and increase over time as you become more comfortable with international exposure.

The right allocation depends on your conviction about U.S. versus international relative returns, your comfort with currency risk, and your time horizon. Younger investors with long time horizons can afford more international exposure because they have time to ride out the cycles. Investors nearing retirement may prefer the familiarity and stability of a domestic-heavy portfolio.

One approach is to recognize that many U.S. large-cap companies already provide significant international exposure. Companies in the S&P 500 generate roughly 40% of their revenue from outside the United States. Owning Coca-Cola gives you exposure to global consumer spending. Owning Apple gives you exposure to worldwide technology adoption. This built-in international exposure means your effective foreign allocation is higher than your direct holdings suggest.

The Quality Framework Abroad

The same quality principles that guide domestic investing apply internationally. Look for companies with durable competitive advantages, strong balance sheets, consistent profitability, and capable management — regardless of where they're headquartered. A wide-moat company in Switzerland is fundamentally more similar to a wide-moat company in America than it is to a mediocre Swiss competitor.

International markets often offer quality businesses at lower valuations than their U.S. equivalents. A global consumer staples company trading at 15 times earnings overseas may be a better value than a comparable American company trading at 25 times earnings, even after accounting for the additional risks of international investing.