There’s a unique phenomenon in the stock market that causes investors to naturally gravitate toward the stocks of their local economies.
It’s called Home Country Bias, and it applies for investors across the globe.
But it’s particularly pernicious for U.S. investors because the United States makes up approximately 42% of the total global equity markets.
In other words, not only are U.S. investors naturally biased in favor of U.S. stocks, but the rest of the world is too, largely on account of the strength of the U.S. economy, the global recognition (and presence) of the brands, and the strong capital conditions.
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?
International Stocks Can Diversify 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 stick to your 401(k) – they generally have diversification built into your fund choices.
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 40 or 50 stocks to do it.
You can achieve a diversified portfolio in any number of ways, from building a diverse “core” of ETFs and then adding individual stocks to target specific trends, to investing in individual names across a variety of asset classes.
In a global economy, the companies with the best growth prospects can operate from anywhere; their opportunities are not necessarily constrained by their borders.
While America’s economy is still larger than China’s and about four 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.
Identifying Strong International Stocks
As with any stocks, the best international 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 its corporate disclosure requirements, or even its own economic reporting.
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 (LKNCY) 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 in response to the invasion of Ukraine have made Russia effectively untouchable on a global scale. And China has faced a barrage of possible tariffs and trade restrictions due to its lax IP protection and posturing around Taiwan.
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 strong international stocks, you bring the potential for significant growth. And in a smaller, but more diverse portfolio, big growth can bring outsized returns with it.
If you’re interested in learning more about international investing, consider a subscription to Cabot Explorer, where Chief Analyst Carl Delfeld covers stocks from around the globe.
