What Are the Benefits of International Portfolio Diversification?

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International stocks bring some different aspects to an investment portfolio that cannot be matched by U.S. stocks alone.

  1. Types

    • International stock markets can be classified into two broad categories: developed markets, such as the United Kingdom and Japan, and emerging markets, such as China and India.

    Growth

    • Emerging market countries have the ability to generate economic growth at rates much higher than developed markets. The U.S. economy is happy to grow at 3 percent in a year whereas China and India can generate growth rates of more than 10 percent in good years.

    Cycles

    • Different economies rise and fall on different cycles. For example, Japan may be having trouble while neighbor South Korea could be doing well.

    Currency

    • U.S. investors holding foreign stocks can benefit if the dollar weakens or the foreign currency strengthens. Growing economies tend to have strengthening currencies, giving U.S. investors a double benefit of holding international stocks.

    Effects

    • Brazil, an emerging market, was one of the best-performing stock markets from 2004 to 2009. The U.S. market, as tracked by the S&P 500, lost 5.6 percent per year from 2006 to 2009, and returned less than 1 percent from 2004 to 2009.

    Identification

    • International portfolio diversification is relatively simple using exchange-traded funds (ETFs). The largest developed market fund is the iShares MSCI EAFE Fund, and the biggest emerging market fund is iShares MSCI Emerging Markets.

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