How to invest in international stocks: Benefits, risks & ways to get started

When you think about investing, you probably think about companies you know. Maybe you own shares of U.S. technology companies, financial institutions or consumer brands.

But what about companies based outside the U.S.?

International stocks can give you a way to invest in businesses around the world. And while investing internationally isn’t right for everyone, it can be one strategic way to diversify your portfolio.

Before you decide whether international stocks are right for you, it helps to understand how they work, what opportunities they may offer and what risks they can bring.

International stocks are shares of companies headquartered outside the U.S.

That might mean investing in a company based in Japan, the United Kingdom or France for example. It also could mean investing in a company based in an emerging market. In other words, international investing gives you the opportunity to look beyond the U.S. when building your portfolio.

U.S. stocks represent companies based in the United States, while international stocks represent companies based in other countries.

But there’s more to international investing than mere geography. When you invest outside the U.S., you’re also investing in economies, governments and financial systems that may work differently than what you’re familiar with. Interest rates, inflation, regulations and government policies can vary from country to country, and those differences can affect businesses and their stock prices.

Currency can play a role, too. If an investment is priced in another currency, changes in the exchange rate can affect your returns when you convert them back to U.S. dollars. You also may see differences in accounting and financial reporting, which can make it more difficult to compare companies across countries.

These differences can create additional risks, but they also can provide access to investment opportunities that may not be available in the U.S. The key is understanding that international investments come with their own set of considerations—and making sure they fit with your overall investment strategy and goals.

International markets usually fall into two groups: developed markets and emerging markets.

Emerging markets are countries where economies and financial markets are still developing and can benefit from economic development as well as growth in population and consumer demand. The potential for economic development also can come with additional risk, such as potential political instability, and may be more volatile than developed markets.

Developed markets generally have established economies, mature financial systems and well-developed stock markets. These countries often feature stronger regulatory oversight, greater market transparency and more stable political environments than emerging markets. While developed markets may offer lower long-term growth potential than emerging markets, they can provide investors with access to many of the world's largest and most established companies, helping balance the higher risks that can come with investing in faster-growing economies.

When a portfolio only includes domestic stocks, its performance is closely tied to what happens in the U.S. economy and financial markets.

Why does that matter?

Markets in different countries don’t always move in the same direction or at the same pace. When one market is experiencing a rough stretch, another may be performing differently.

By diversifying investments across countries and regions, investors aren’t relying as heavily on the performance of any one market. It’s another way diversification can help investors manage risk while giving your money an opportunity to participate in growth around the world.

That doesn’t mean international stocks will necessarily protect your portfolio from losses. They still can dip when markets fall. But investing across countries may help reduce how heavily your portfolio depends on the U.S. market.

It also may help you combat a common investing tendency called home bias.

Home bias happens when investors favor investments in their own country, just because. It’s understandable—if you’re a U.S. investor, you’re probably more familiar with U.S. companies and the U.S. economy than you are with companies based halfway around the world.

But it’s important to remember that familiarity isn’t necessarily diversification and you may want to think about discussing your options for investment abroad.

Some international economies have opportunities for growth as populations expand, consumer markets develop and businesses invest in infrastructure and technology.

That growth can create opportunities for companies operating in those markets.

But it’s important to keep expectations in check. International stocks won’t necessarily outperform U.S. stocks. Different markets can lead at different times, and past performance doesn’t tell you which market will perform best next.

For many investors, the value of international investing isn’t about trying to pick the winning country. It’s about building a portfolio that isn’t dependent on just one.

Of course, investing internationally isn’t without risk. Along with the market risks you already face when investing in stocks, international investments can be affected by factors less common or severe in the U.S.

Suppose you invest in a company whose shares are denominated in a foreign currency. The value of that currency can rise or fall relative to the U.S. dollar. Those changes can affect your investment return when it’s converted back into U.S. dollars.

In some cases, a foreign company’s stock may increase in value, but a decline in its currency can reduce your return as a U.S. investor.

Some international funds use a currency-hedging approach to help manage this risk. Other funds don’t hedge currency exposure. Understanding the difference can help you know what role a particular investment may play in your portfolio.

Governments make decisions that can affect businesses and investors. A change in government policy, a new trade restriction or geopolitical uncertainty can influence companies operating in a particular country or region.

Regulations also vary from country to country. A rule that affects a business one way in the U.S. may be handled very differently somewhere else.

These differences are another reason international investing requires you to look beyond a company’s financial statements.

International markets can be more volatile than U.S. markets, particularly in some emerging markets.

Economic conditions can change quickly. Inflation, interest rates, political developments and changes in consumer demand all can affect stock prices.

Some international markets also have fewer buyers and sellers than the U.S. market, which can contribute to larger price movements.

That doesn’t necessarily make international stocks a bad investment. It simply means you should consider how much volatility you’re comfortable with before investing.

You also may encounter differences in how companies report financial information.

Accounting standards and disclosure requirements aren’t identical around the world. That can make it more difficult to compare a foreign company with a U.S. company.

Taxes are another consideration. Some foreign governments withhold taxes on dividends paid to U.S. investors. If you own certain international investments in a taxable account, you may be eligible for a foreign tax credit.

Tax rules can vary based on your circumstances, so consider talking with a qualified tax professional about your situation.

If you decide international investing may have a place in your portfolio, you have several options.

You can invest through a mutual fund or an exchange-traded fund (ETF), or you can purchase individual international stocks. Each approach has its own potential advantages and considerations.

An international stock mutual fund pools money from multiple investors and uses it to purchase a collection of international investments.

For many investors, that can make international investing easier.

Rather than researching companies in several countries yourself, you can choose a fund that provides exposure to a range of companies and markets. A professionally managed mutual fund handles the day-to-day investment decisions.

Because a mutual fund may own many securities, it can provide diversification that would be difficult to achieve by buying individual stocks.

ETFs are another way to invest in international stocks. Like individual stocks, ETFs trade on an exchange during the trading day. Many international ETFs invest in a broad collection of companies, which can provide diversification across countries and industries.

There are also different approaches to managing currency exposure.

A currency-hedged ETF uses strategies designed to reduce the effect of changes in exchange rates. An unhedged ETF generally leaves that currency exposure in place.

Many investors also appreciate that there are international ETFs with relatively low costs.

But cost is only one factor to consider. It’s also important to understand what an ETF owns and how its strategy fits with your overall portfolio.

You also can buy shares of individual companies based outside the U.S.

This gives you more control over which companies you own. But that control comes with more responsibility.

You’ll need to research the company, its industry and its financial position. You’ll also need to consider the country where the company operates, including its economy, regulations, currency and political environment.

And because you’re investing in individual companies, you may take on more concentration risk than you would with a diversified fund.

You may not need a separate account to invest internationally.

Many 401(k) plans and IRAs offer international stock funds or other investments with international exposure. If you’re participating in a workplace retirement plan, check your plan’s investment options to see what’s available.

The type of account you use also can affect the tax treatment of your investments. Tax-advantaged retirement accounts and taxable investment accounts have different rules, which may affect where you choose to hold certain investments.

If you’re not sure how international investments fit into your retirement strategy, a financial advisor can help you look at the bigger picture.

The amount that’s appropriate for you depends on your financial goals, risk tolerance, time horizon and the investments you already have.

It can help to consider just how large the global stock market is. The U.S. represents roughly 60% to 65%  of global equity market capitalization, depending on the index and measurement date. That means a significant share of the world’s publicly traded companies are located outside the U.S.

Some investors use global market-cap weighting as a starting point. This approach generally means allocating investments based on the relative size of each country’s stock market.

Others choose to invest more heavily in U.S. stocks because they’re more familiar with the companies and market. There’s nothing wrong with having a home bias. The important thing is to understand that you have one and decide whether it’s consistent with your investment strategy.

Your personal circumstances matter, too.

If you have a shorter investment time horizon or aren’t comfortable with significant market fluctuations, you may prefer less exposure to investments that can be more volatile. If you have a longer time horizon and are comfortable taking on more risk, you may be willing to accept greater international exposure.

The goal isn’t to find a percentage that works for everyone. It’s to understand how international investments fit with the rest of your portfolio and your long-term goals.

Not necessarily. There are many ways to diversify a portfolio. You can invest across different asset classes, industries, company sizes and types of investments without owning international stocks.

But even though many U.S. companies sell their products or services to overseas customers, if nearly all of your stock investments are U.S.-based, you may have more exposure to one market than you realize.

That doesn’t mean you need to invest internationally—or that more international exposure is always better.

Instead, consider what makes sense for you.

Think about your goals. How long do you have to invest? How much risk are you comfortable taking? And what does your portfolio already look like?

Those questions can help you decide whether international stocks have a place in your investment strategy.

A Thrivent financial advisor can help you review your goals, risk tolerance and current investments and explore whether international exposure may make sense for your financial strategy.