You want to make money in the stock market, right? It’s probably safe to assume that’s why you’re investing. And the fact is, if you play it right, investing is one of the best ways to build wealth. But too many investors ignore the benefits of including some of the best foreign stocks in their portfolios.
It’s understandable, of course. U.S. investors are familiar with many of the big names in the stock market. We know the companies and what they do. And it feels safer to stick with what you know. That’s true, no matter where you are. In fact, it’s such a common phenomenon that it has a name: Home Country Bias.
But when you look beyond the borders of your own country, you’ll find a literal world out there that has terrific potential. There are international blue-chip stocks. You can find value stocks and growth stocks in countries around the globe. There are high-quality pharmaceutical companies and consumer stocks with steady and secure revenue.
The question is, of all the stocks out there, how can you find the best foreign stocks and avoid risky stocks when you don’t know what these companies are or what they do?
Why foreign stocks belong in your portfolio
We talk a lot about diversifying a portfolio to expand the opportunities for significant gains and lower your potential risk. This is easy enough when you invest in an ETF or stick to your 401k – they generally have diversification built in.
Here at Cabot, we also believe that it’s easier than ever to invest on your own, and that there are plenty of good reasons to do just that. And you don’t need the 40, 50, or more stocks of an ETF to diversify. In fact, you can hold a diverse and profitable portfolio with as little as 10 or 12 stocks. Naturally, that diversification includes holding a mix of some of the best U.S. stocks along with some of the best foreign stocks, and maybe even a speculative stock or two, but that’s a discussion for another time.
When you think about it, why should the world’s best companies with the best growth prospects happen to be in America or wherever your home country happens to be? While America’s economy is still larger than China’s and almost three times that of former rival Japan, we now live in a different, more global world due to incredible jumps in technology and communications.
In short, where a company is based means less and less; what it does and how it performs are what matter now.
Where (and how) to find the best foreign stocks
As with any stocks, the best foreign stocks are high-quality companies with good growth and strong balance sheets. It’s also important to focus on long-term factors. While the markets can be volatile at times, the day-to-day up-and-down swings should not deter eager investors.
And yes, there are risks to international investing. Not every country is as stringent in requiring quarterly and special situation reports from publicly traded entities. Shares may not have the protections that U.S. investors find with the SEC, in cases of fraud or bankruptcy.
U.S. stock markets are perhaps the most transparent in the world. Accounting scandals, while they do occur periodically, are relatively uncommon. That is not necessarily the case in certain foreign markets; look no further than what happened with Luckin Coffee (LK) in 2020.
Furthermore, political shifts can lead to significant economic shifts in a country, impacting such things as trade, capital markets, and corporate profits for companies operating in those regions. We’re seeing it now in Russia and, to a lesser extent, China. Unprecedented sanctions and actions taken by the Russian government have made Russian stocks impossible to own for foreign investors. And China and the SEC have been battling over compliance requirements that could result in suspended trading of dual-listed companies.
But the good news is that there are several ways to reduce these risks and still enjoy the benefits of international investing. Targeting ETFs, mutual funds, and American Depositary Receipts (ADRs) of friendly countries and companies that comply with U.S. listing and reporting standards can limit your risks.
Investors buy and sell ADRs just as they buy and sell U.S. stocks. ADRs are quoted in U.S. dollars and pay dividends in U.S. dollars.
When you find and invest in some of the best foreign stocks on the market, you bring the potential for significant growth. And in a smaller, but more diverse portfolio, big growth can bring outsized returns with it.
Do you include foreign stocks in your portfolio? Share your thoughts and ideas in the comments below.
*This post was originally published in 2020 and has been updated to reflect current market conditions.