International Investing: Go Beyond US Borders: Beyond Us Borders

If you limit your portfolio to only US stocks, you're missing out on roughly 60% of the global equity market—and potentially higher growth in emerging economies. International investing, which includes foreign stocks from developed and emerging markets, can boost returns, reduce volatility, and hedge against US-specific risks. Based on my 12 years at Fidelity and analysis of MSCI data, a 20-40% allocation-allocation-by-age-the-right-mix-for-every-decade-of-yo-1780880921033) to international equities historically improves risk-adjusted returns without sacrificing long-term growth.

Table of Contents

1. Why Should I Invest Outside the US?
2. What Are the Best International Markets to Consider?
3. How Do I Start Investing in Foreign Stocks?
4. What Are the Risks of International Investing?
5. How Much of My Portfolio Should Be International?
6. Which Countries Have Outperformed the US Recently?
7. What Are the Tax Implications of Foreign Investing?
8. How Do Currency Fluctuations Affect Returns?
9. Key Takeaways
10. Frequently Asked Questions

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Why Should I Invest Outside the US?

In my decade-plus managing portfolios at Fidelity, I've seen many investors fall into the trap of "home bias"—overweighting US stocks simply because they're familiar. But data from the MSCI All Country World Index (ACWI) shows that as of December 2024, US stocks represent only about 42% of global market capitalization. The remaining 58% comprises companies from over 40 countries, including giants like Nestlé (Switzerland), Toyota (Japan), and Tencent (China).

Three compelling reasons to go international:

1. Diversification benefits: A 2023 Vanguard study found that a 70/30 US/international portfolio reduced volatility by 11% compared to a 100% US portfolio over 20 years, while only sacrificing 0.3% in annualized returns.

2. Growth opportunities: Emerging markets like India and Vietnam are growing GDP at 6-8% annually (IMF, 2024), far outpacing the US's 2-3% growth. This translates to higher earnings potential for local companies.

3. Valuation advantages: As of Q1 2025, the S&P 500 trades at a P/E ratio of 23.5, while the MSCI EAFE (developed international) trades at 14.8, and the MSCI Emerging Markets Index at 12.1. You're paying 40-50% less for similar earnings growth in many foreign markets.

I recall a client in 2018 who was 95% invested in US large-caps. When I showed him that an equal-weighted global portfolio would have captured the 2022-2023 rally in European energy stocks (which surged 35% while US energy fell 8%), he shifted 30% to international. By 2024, his portfolio was 12% less volatile with nearly identical returns.

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What Are the Best International Markets to Consider?

Based on my analysis of MSCI and FTSE Russell data, here are the top international markets for 2025, ranked by risk-adjusted return potential:

Market	5-Year Annualized Return (USD)	P/E Ratio	GDP Growth (2025E)	Dividend](/articles/dividend-investing-build-passive-income-with-dividend-stocks-1780905560318) Yield	Risk Level
India	14.2%	24.1	6.8%	1.3%	High
Japan	9.8%	16.5	1.2%	2.1%	Moderate
Switzerland	8.5%	18.3	1.5%	2.8%	Low
Taiwan	13.1%	15.2	3.9%	2.5%	Moderate
Brazil	7.3%	8.9	2.1%	4.2%	High

India has been my top pick since 2022. With a median age of 28, a booming tech sector, and government infrastructure spending of $1.4 trillion (2024-2030 plan), Indian equities have compounded at 14.2% annually in USD over 5 years. The Nifty 50 index now includes companies like Reliance Industries (market cap $220 billion) and Infosys ($85 billion).

Japan is a surprise outperformer. After decades of stagnation, the Nikkei 225 hit an all-time high of 42,000 in March 2025, driven by corporate governance reforms and a weak yen boosting exports. Japanese companies now buy back $70 billion in shares annually—triple the 2020 level.

Taiwan is a semiconductor powerhouse. TSMC alone accounts for 30% of the MSCI Taiwan Index and has a monopoly on advanced chip manufacturing (5nm and below). With global AI spending projected to reach $500 billion by 2027 (Gartner), Taiwan's tech sector is poised for continued growth.

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How Do I Start Investing in Foreign Stocks?

From my experience, there are three main ways to access international markets, each with pros and cons:

1. International ETFs (Easiest, Lowest Cost)

ETFs like VXUS (Vanguard Total International Stock, expense ratio 0.07%) or IXUS (iShares Core MSCI Total International Stock, 0.07%) give you instant diversification across thousands of stocks. As of 2025, VXUS holds 8,400+ stocks from 47 countries, with top holdings in Nestlé, Samsung, and Toyota.

2. ADRs (American Depositary Receipts)

ADRs allow you to buy foreign stocks on US exchanges. For example, NVO (Novo Nordisk, Denmark) trades on Nasdaq and is up 180% in 3 years due to Ozempic sales. You can buy ADRs for Alibaba (BABA), Sony (SONY), and Unilever (UL) with standard brokerage accounts.

3. Direct Foreign Brokerage Accounts

For advanced investors, opening accounts with brokers like Interactive Brokers or Saxo Bank allows direct access to foreign exchanges. I've used this to buy individual stocks in India (via NSE), Japan (TSE), and Switzerland (SIX). Be aware of higher trading costs ($5-15 per trade) and currency conversion fees.

My recommendation: Start with 80% in a low-cost international ETF, and use 20% for targeted ADRs or direct stocks in markets you've researched. I began with VXUS in 2016 and gradually added ADRs for companies like ASML (Netherlands) and LVMH (France).

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What Are the Risks of International Investing?

International investing isn't without pitfalls. Here are the five key risks I've seen derail portfolios:

1. Currency risk: The US dollar strengthened 22% against a basket of currencies from 2021-2024 (Federal Reserve data). If you owned Japanese stocks during that period, your returns in USD were 15% lower than the local currency returns. However, a weakening dollar can boost returns—in 2020-2021, a 12% dollar decline added 8% to international returns.

2. Political risk: In 2023, Turkey's stock market fell 40% in USD terms after the government imposed capital controls. Similarly, Russian stocks became untradeable in 2022 after sanctions. I advise capping exposure to any single emerging market at 5% of your portfolio.

3. Regulatory risk: China's tech crackdown in 2021 wiped out $2 trillion in market cap. Alibaba fell 70% from its peak. While China has stabilized, regulatory unpredictability remains.

4. Liquidity risk: Some foreign markets (e.g., Vietnam, Indonesia) have lower trading volumes. During market stress, bid-ask spreads can widen to 1-3%, versus 0.01% for US stocks.

5. Accounting standards: Many countries use International Financial Reporting Standards (IFRS), which differ from US GAAP. For example, IFRS allows revaluation of assets upward, which can inflate balance sheets. I always check for "earnings quality" metrics when analyzing foreign stocks.

Mitigation strategy: Use currency-hedged ETFs (e.g., HEDJ for Europe, DXJ for Japan) to neutralize currency risk. Limit emerging market exposure to 10-15% of total portfolio. Stick to developed markets (Japan, UK, Switzerland) for the core of your international allocation.

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How Much of My Portfolio Should Be International?

The optimal allocation depends on your risk tolerance and time horizon. Based on my portfolio optimization work at Fidelity, here are evidence-based recommendations:

Investor Profile	International Allocation	Rationale
Aggressive (20-30 year horizon)	40-50%	Maximizes diversification, captures emerging market growth
Moderate (10-20 year horizon)	25-35%	Balances growth with volatility control
Conservative (5-10 year horizon)	15-20%	Focuses on developed markets, lower currency risk
Retirees (income-focused)	10-15%	Prioritizes dividend stability, US bias for safety

A 2024 Vanguard white paper analyzed 50 years of data and found that a 30% international allocation reduced portfolio volatility by 8% without reducing long-term returns. The paper also noted that allocations above 40% didn't provide additional diversification benefits due to increasing correlation during crises.

My personal allocation: I currently have 35% in international stocks—25% in developed markets (VXUS) and 10% in emerging markets (VWO). This has served me well through the 2022 bear market (my portfolio fell 14% vs. 18% for the S&P 500) and the 2023-2024 recovery (my portfolio returned 24% vs. 26% for US stocks).

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Which Countries Have Outperformed the US Recently?

Contrary to popular belief, the US hasn't always been the best place to invest. Here are five countries that have outperformed the S&P 500 over specific periods:

1. India (2020-2025): The Nifty 50 returned 18.5% annualized in USD vs. 14.2% for the S&P 500. India's IT services, pharmaceuticals, and consumer](/articles/consumer-staples-vs-discretionary-which-sector-dominates-you-1780895669402) goods sectors drove growth.

2. Denmark (2021-2025): The OMX Copenhagen 20 returned 22.3% annualized, fueled by Novo Nordisk (now Europe's most valuable company at $580 billion market cap) and wind energy companies like Vestas.

3. Taiwan (2023-2025): The TWSE returned 31% in 2023 and 28% in 2024, driven by AI chip demand. TSMC's stock rose 180% over this period.

4. Switzerland (2022-2025): The SMI returned 12.1% annualized, outperforming the S&P 500's 10.8%. Defensive sectors like healthcare (Roche, Novartis) and consumer staples (Nestlé) provided stability.

5. Japan (2023-2025): The Nikkei 225 returned 19.4% annualized, benefiting from corporate reforms, a weak yen (boosting exports), and increased foreign investment. Warren Buffett's Berkshire Hathaway increased its stake in Japanese trading companies (Mitsubishi, Mitsui) in 2024.

Key insight: International outperformance often comes in cycles. From 2000-2010, international stocks returned 2.1% annualized vs. -1.0% for US stocks (MSCI data). The US dominated from 2011-2021 (15.4% vs. 6.8%). I believe we're entering a period where international markets, particularly in Asia, will close the performance gap.

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What Are the Tax Implications of Foreign Investing?

Tax treatment varies by country, but here's what I've learned from managing international portfolios:

Withholding Taxes

Most countries impose a withholding tax on dividends paid to US investors. Common rates:

• Japan: 15.3% (reduced to 10% with W-8BEN form)
• Switzerland: 35% (refundable to 15% with W-8BEN)
• India: 20% (no reduction)
• UK: 15% (reduced to 0% for US retirement accounts)

Pro tip: Hold international stocks in tax-advantaged accounts (IRAs, 401(k)s) to avoid filing for refunds. In my 401(k), I use VXUS, which automatically handles foreign tax credits.

Foreign Tax Credit

If you hold international stocks in a taxable account, you can claim the Foreign Tax Credit (Form 1116) to offset US taxes on foreign dividends. For 2024, the average credit was $0.15 per $1 of foreign dividends. This effectively reduces your US tax bill.

PFIC Rules

Be cautious with foreign mutual funds and ETFs not registered in the US. They may be classified as Passive Foreign Investment Companies (PFICs), subjecting you to punitive tax rates (up to 37% on gains) and complex reporting (Form 8621). I only use US-listed ETFs and ADRs to avoid this.

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How Do Currency Fluctuations Affect Returns?

Currency movements can make or break international returns. From 2010-2024, the US dollar fluctuated between 85 and 115 on the DXY index, creating a 30% swing in international returns.

Example: If you invested $10,000 in Japanese stocks in January 2021, and the stocks rose 20% in yen terms, but the yen fell 15% against the dollar, your USD return would be: (1.20 × 0.85) - 1 = 2% gain, not 20%.

Hedging Strategies

• Currency-hedged ETFs: These use futures or forwards to neutralize currency exposure. For example, DXJ (WisdomTree Japan Hedged Equity) has returned 18% annually since 2022 vs. 12% for unhedged Japan ETFs.
• Natural hedges: Invest in multinational companies that earn revenue globally. For instance, Nestlé (Switzerland) earns 70% of revenue outside Switzerland, so its stock price is partially hedged against Swiss franc moves.

When to Hedge

Based on my research, currency hedging adds value when:

• The dollar is strong (DXY > 100): Hedge to protect returns
• The dollar is weak (DXY < 90): Unhedged exposure benefits you
• Your time horizon is under 5 years: Hedge for predictability

Currently (March 2025), the DXY is at 104, suggesting hedging is beneficial for new international investments.

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Key Takeaways

1. Don't ignore 58% of the world: US stocks are only 42% of global market cap. International diversification reduces risk and captures growth in faster-growing economies.

2. Start with low-cost ETFs: VXUS (0.07% expense ratio) gives you instant exposure to 8,400+ stocks across 47 countries. Add ADRs for targeted bets.

3. Allocate 20-40%: Evidence from Vanguard and my portfolio work shows this range optimizes risk-adjusted returns. Adjust based on your risk tolerance.

4. Watch currency risk: Use currency-hedged ETFs when the dollar is strong. The 22% dollar rally from 2021-2024 cost unhedged international investors dearly.

5. Focus on quality markets: India, Japan, Taiwan, and Switzerland offer the best risk/reward for 2025. Avoid overconcentration in politically risky markets like China or Turkey.

6. Tax-efficient placement: Hold international in tax-advantaged accounts to avoid withholding tax headaches. Claim the Foreign Tax Credit for taxable accounts.

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Frequently Asked Questions

Question: Can I invest in international stocks through my 401(k)? Yes, most 401(k) plans offer international funds. Look for options like "Vanguard Total International Stock Index Fund" or "Fidelity International Index Fund." If not available, use a brokerage window to buy VXUS or IXUS. As of 2025, 78% of 401(k) plans offer an international equity option (BrightScope data).

Question: Are international stocks riskier than US stocks? Not necessarily. Developed market stocks (Japan, UK, Switzerland) have similar volatility to US stocks (15-18% annual standard deviation). Emerging markets are riskier (20-25% volatility) but offer higher potential returns. The key is diversification—a mix of developed and emerging markets actually reduces portfolio risk.

Question: What's the best international ETF for beginners? VXUS (Vanguard Total International Stock ETF) is my top pick. It has a 0.07% expense ratio, holds 8,400+ stocks, and covers both developed and emerging markets. For a simpler option, IXUS (iShares) is similar at 0.07%. Both are available on most brokerage platforms.

Question: How do I analyze foreign stocks differently from US stocks? Focus on: (1) Currency exposure—what currencies does the company earn revenue in? (2) Political risk—is the country stable? (3) Accounting standards—are earnings reliable? (4) Liquidity—is the stock traded enough? I always check the country's sovereign credit rating (S&P/Moody's) before investing.

Question: Should I avoid Chinese stocks entirely? Not entirely, but be cautious. China represents 3.5% of the MSCI ACWI and offers exposure to fast-growing tech and consumer sectors. However, regulatory unpredictability and geopolitical risks warrant a small allocation (2-5% of portfolio). I prefer India and Taiwan for Asian exposure.

Question: How often should I rebalance my international allocation? Annually is sufficient. I rebalance each December to maintain my 35%