As an investor, diversification is a key strategy to manage risk and enhance returns. While the U.S. stock market remains the world’s largest, there are compelling reasons to allocate a portion of your portfolio to international investments.

Overseas markets often outperform U.S. markets due to unique local factors influencing each country’s business cycle. However, it’s essential to consider the risks associated with international investing.

Determining the Ideal Allocation

The ideal percentage of international allocation varies based on individual preferences and risk tolerance. Financial advisors commonly recommend around 20%; however, allocations can range from 5% to 40%.

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Personally, I have allocated 17% to international stocks, complemented by 60% in domestic stocks, 13% in bonds, 7% in options, and the remainder in cash.

Navigating Political and Currency Risks

Political and currency risks differ across countries, making it prudent to focus on markets in developed countries. While returns in developing countries can be enticing, the elevated risks require careful consideration.

Investing in large companies within developed countries can offer international exposure with manageable risk.

Investment Methods: Mutual Funds and ADRs

Investing internationally can be accomplished through various methods. For those seeking simplicity, international equity mutual funds are an accessible option.

With 1,378 international equity mutual funds listed on Fidelity’s platform, there is ample choice. Of these, 99 are rated 5 Stars by Morningstar, and seven are rated 5 Stars with Low Expense. Those seven are:

For the DIY investors, direct investment in international companies is feasible. One approach involves trading Over the Counter (OTC) market stocks. However, OTC trading carries additional risks, such as reduced transparency and the potential for unfavorable pricing.

A more secure alternative is investing in American Depositary Receipts (ADRs) on the New York Stock Exchange. ADRs represent ownership in securities of foreign companies, allowing for easy U.S. trading with a high level of transparency. Trading like regular stocks, many investors may not even realize they own ADRs.

Selecting Quality ADRs

Fidelity’s stock screener lists 1,239 ADRs, offering a diverse selection of investment opportunities. Of those companies, 19 received an outlook of Very Bullish. Those companies are:

The table reflects a wide range of sectors, and span various geographic regions, making it easy to find quality international investments across the S&P 500 sectors.

If you find yourself under-diversified internationally as well as in a particular sector, you could kill two birds with one stone. For example, if you have no healthcare holdings and no exposure to Europe, Novartis AG (NYSE: NVS) or Sanofi (NSDQ: SNY) could help fill both gaps.

The Importance of Portfolio Checkup

To ensure a well-balanced portfolio, conduct a periodic checkup to assess your international exposure. Overcoming “home bias” is vital, as it enables you to capitalize on opportunities beyond your domestic market.

The world is filled with quality companies, and overlooking international prospects could limit your portfolio’s growth potential.

Conclusion

Diversifying your portfolio with international investments can enhance returns and mitigate risk. Although the U.S. market remains strong, the performance of overseas markets can present lucrative opportunities.

By understanding the risks and opting for suitable investment vehicles, investors can benefit from global economic growth and diversify their holdings for long-term success.

Editor’s Note: Our colleague Jim Pearce doesn’t worry about global risks…he makes money from them.

Jim Pearce is chief investment strategist of our premium trading service, Mayhem Trader. Jim has developed an under-the-radar strategy to flip market mayhem into fast payouts. Want to learn more? Click here now.

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